On March 19, 2019, the Federal Government tabled its latest budget, which introduces changes to the tax rules applicable to contributions to Specified Multi Employer Plans (SMEPs) in respect of employees over age 71 and re-employed retirees.
What are the CURRENT Contribution Rules for SMEPs for Older Members?
In general, the Income Tax Act (Canada) (ITA) prohibits an older member of a pension plan from accruing pension benefits in the following cases: (1) after the end of the year in which the member attains 71 years of age; and (2) if the member has returned to work and is receiving a pension from the plan (a re-employed retiree). However, contributions to a SMEP in respect of members over age 71 and re-employed retirees are currently deemed to be eligible contributions for tax purposes. The Canada Revenue Agency recognized that contributions to a SMEP are typically made pursuant to a collective agreement that may require pension contributions as a condition of employment without any differentiation based on age or re-employment. As a result, it permitted such contributions to be made to a SMEP even where an employee did not accrue a benefit (for instance, an employee over age 71 or an employee collecting a plan pension).
What are the NEW Contribution Rules?
The new rules will amend the ITA to prohibit contributions to a SMEP made in respect of either:
- a member after the end of the year in which the member attains 71 years of age; or
- a member that is in receipt of benefits from the SMEP (i.e. a re-employed retiree) (except if the member is receiving benefits under a qualifying phased retirement program).
The government's policy rationale for this change is to ensure that contributions are not being made for employees who cannot benefit from them.
When Do the New Rules Apply?
The new rules will apply to any contributions to a SMEP made pursuant to any collective bargaining agreement entered into after December 31, 2019. They do not apply to contributions made on or before such collective agreement is entered into.
- These changes are significant for both administrators of SMEPs and for the parties (employers/unions) that bargain contributions into collective agreements.
- Once the new rules apply, administrators of SMEPs will no longer be able to accept contributions made in respect of a member after the year the member turns age 71 or in respect of a re-employed retiree.
- Collective agreements entered into after December 31, 2019 should reflect the fact that contributions cannot be made to a SMEP in respect of these older pension plan members.
- Failure to comply with these new contribution rules could result in a SMEP's registration being revoked by the Canada Revenue Agency.
- Any entity that may be affected by these changes should carefully review these new rules as set out in the Budget and begin to assess the impact of the changes and the appropriate response.
 Canada Revenue Agency, Compliance Bulletin No. 7 (May 10, 2011).
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