On February 4, 2022, the Department of Finance released for public comment a set of draft legislative proposals to implement previously announced tax measures. You can read Osler's comprehensive overview of the proposed tax changes.
In the pension context, the most important announcement relates to pension plan administrators (administrators) being able to correct contribution errors relating to defined contribution registered pension plans (DC RPPs).
Section 147.1 of the Income Tax Act (the ITA) sets out rules relating to the registration, amendment, administration and revocation of registration of a registered pension plan. This legislative section also contains the pension adjustment limits and the restriction on the payment of past service benefits.
The ITA does not currently permit administrators to accept retroactive contributions to employee accounts under a DC RPP in order to correct prior year under-contribution errors. This prohibition is in contrast to the rules relating to defined benefit plans, which allow administrators to provide additional benefits to an employee in respect of past years of service. While in some circumstances an administrator may rectify over-contribution errors by refunding the excess to the contributor, these rules have been found to be cumbersome.
In the 2021 Federal Budget, the government announced its intentions to provide more flexibility to administrators of DC RPPs to correct for under-contributions and over-contributions. In line with the 2021 Federal Budget, the Department of Finance's draft proposals would permit certain types of errors to be corrected via additional contributions to an employee's account under a DC RPP to compensate for an under-contribution error made in any of the preceding five years, subject to a dollar limit. The proposals would also permit administrators to correct for pension over-contribution errors in respect of an employee for any of the five years prior to the year in which the excess amount is refunded to the contributor (whether that be the employer or the employee).
Under the proposed rules, the permitted corrective contribution will decrease the employee's registered retirement savings plan (RRSP) room for the taxation year following the year in which the contribution is made. In the event the correction leads to an employee having negative RRSP room, that employee is banned from making new contributions until the employee earns future RRSP room and eliminates the negative balance.
Submissions on the proposed pension related tax measures are due by March 7, 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.