On March 19, 2007, Finance Minister Jim Flaherty
tabled his second federal budget which contained some
unexpected proposals aimed at helping seniors achieve
semi-retirement while, at the same time, beginning to
address potential workforce shortages and aging population
issues faced by Canadian employers.
Approval of the budget in the House of Commons is not
assured, as the minority Conservative government requires
the support of at least one of the other parties. Early indications,
however, suggest that the budget will be approved
with the support of a majority of members of Parliament.
The following is a summary of the key budget proposals
that will impact retirement.
Phased Retirement
The budget includes a proposal to encourage older workers
to stay active in the labour market by granting sponsors of
defined benefit (DB) registered pension plans (RPPs) the
ability to give qualified members the option to receive partial
pension payments while continuing to work and accrue
further pension benefits. This type of “phased retirement”
is currently not permitted by the Income Tax Regulations,
which specifically prevent a member of a DB RPP from
collecting pension benefits while continuing to accrue
pensionable service under the same plan or another DB
RPP of the same or a related employer.
The proposal set out in the budget will apply to plan
members who are 55 years of age or older and eligible for
an unreduced pension. DB RPPs will be permitted (but not
required) to allow any such qualified member to receive
a partial pension payment of up to 60% of their accrued
DB pension, including both lifetime pension benefits and
bridge benefits, as if the member were fully retired. At the
same time, the member would continue to accrue additional
pension benefits based on actual service with the employer.
Members who elect phased retirement would not, however,
accrue additional pension benefits during periods of
absence or reduced pay.
The budget proposal does not tie the ability to offer phased
retirement to a reduction in work time or salary, as is
currently required by existing phased retirement provisions
in Alberta, Manitoba and Québec. Similarly, the budget
proposal does not provide guidance as to when or how often
the member's pension benefit may be recalculated to take
into account additional pensionable service and increased
annualized earnings.
The government anticipates that the proposed changes
will come into effect beginning in 2008, following a period
of consultation on the technical aspects of the proposed
changes.
The prohibition on accruing additional pension benefits while
receiving a pension will continue to apply to “designated plans”
as well as to “connected persons”. Designated plans are
generally plans set up for an individual (i.e., an individual
pension plan or IPP) or for a group of senior managers or
other high-income earners. A member will generally be
considered to be a “connected person” if he or she has a
non-arm's length relationship with the plan sponsor or, in
the case of a corporate plan sponsor, the member owns at
least 10% of the shares of the plan sponsor or an affiliated
company.
Plan sponsors who wish to offer phased retirement will
need to carefully consider how to draft the necessary plan
amendments and communicate the program to employees.
The budget proposal, for example, does not appear to
impact the eligible “class” requirements in pension benefits
standards legislations and thus may not permit plan sponsors
to offer phased retirement to specific employees or groups
of employees.
Maximum Deferral Age Increased for Registered Plans
Canadians must currently cease contributing to a registered
retirement savings plan (RRSP) and, in fact, must terminate
the RRSP or initiate a withdrawal program through a registered
retirement income fund (RRIF) or a qualifying annuity, by
the end of the year in which the individual turns 69 years
of age. Similarly, RPP payments must currently begin no
later than the end of the year in which the member turns
69. Effective for 2007 and subsequent years, the budget
proposes to extend the maximum age limit to start payment
of benefits earned under an RRSP or an RPP to the end of
the calendar year in which the individual attains age 71.
Under transitional rules, individuals with an RRIF turning
age 70 or 71 in 2007 may waive the minimum withdrawal
requirement for 2007 (individuals turning 70 in 2007 may
also be exempted from the minimum withdrawal requirement
for 2008). In addition, such individuals will be allowed
to make RRSP contributions for 2007 and 2008 to the extent
that they have available RRSP deduction room. Members of
an RPP will be allowed to continue to accrue benefits until
the end of the year in which they reach 71, subject of course to
existing limits on years of service and annual pension benefits.
In order to take advantage of the proposed higher age limit,
plan sponsors will need to prepare and file plan amendments
incorporating the higher age limits. While the ITA will not
require plan sponsors to raise age limits, plan sponsors may
want to consider whether maintaining existing age limits will
expose them to the risk of age discrimination complaints from
older plan members.
Pension Income Splitting
The budget restates a promise made by the Minister of Finance
on October 31, 2006, by including measures to allow pension
income splitting. If enacted, the proposal will allow qualified
pensioners to allocate up to 50% of their pension income to
their spouse or common-law spouse each tax year, beginning
in 2007. Both the pensioner and the spouse or common-law
partner must agree to the allocation on their tax returns in
order for the pension income splitting to occur.
Should both individuals agree to the pension income splitting,
the allocated amount will be deducted from the income of the
pensioner making the allocation and included in computing
the taxable income of the lower income spouse or common-law
partner. As such, the proposal will reduce the total tax payable
by couples who are in separate tax brackets.
It should be noted that amounts received from a government
pension program (i.e., CPP/QPP, OAS, GLS) are not subject
to the proposed pension splitting rules, although existing
CPP credit splitting will remain. Similarly, amounts payable
from an unregistered supplemental retirement plan are not
included in the budget proposal.
The budget did not contain any details concerning how pension
income splitting will be administered and reported on personal
tax returns, or how withholding tax requirements for pension
benefit administrators will be affected.
Qualified Investments
The budget proposes that the list of “qualified investments”
for RRSPs and RPPs be expanded, effective March 19, 2007,
to include:
- any debt obligation that has an investment grade rating
from a recognized credit rating agency and is part of
a minimum $25 million issuance; and
- any security that is listed on a “designated stock exchange”
other than derivatives or futures contracts where the
holder's risk of loss may exceed the holder's cost.
Designated stock exchanges will include all stock exchanges
currently listed in the Income Tax Regulations and any stock exchanges
designated in the future by the Minister of Finance.
The Conservative government believes that these changes
will provide registered plan investors with greater investment
choices and diversification opportunities by, for example, permitting
investments in foreign-listed trusts and partnership units and
in Canadian dollar denominated bonds issued by foreign entities
(i.e., “Maple Bonds”).
Canada-U.S. Tax Treaty
The budget also commented on the status of a number of other
future proposals. Most notably, the budget suggests that an
updated Canada-U.S. Tax Treaty has been agreed to in principle,
which will include provisions to better harmonize the
tax treatment of pension contributions between Canada and
the United States and clarify the treatment of stock options.
Conclusion
While none of these budget proposals has elicited great attention or
controversy, the prospects of each proposal being introduced
into law are likely connected to the passage of the budget as
a whole. At the time of writing, the budget appears likely to
pass as tabled, although the minority status of the Conservative
government and media speculation regarding the possibility
of a spring election combine to suggest that the budget's
passage is by no means guaranteed. We will continue to monitor
developments with the budget and will advise you if and when
these proposals are enacted into law.
Bennett Jones