On February 4, 2022, the federal government released a set of draft legislative proposals relating to the Income Tax Act (Canada) for public comment. Many of these proposals implement changes previously announced or confirmed in Budget 2021: A Recovery Plan for Jobs, Growth, and Resilience.
This article discusses the draft proposals that are of interest to administrators of pension and benefit plans.
Fixing contribution errors in defined contribution pension plans
The draft amendments will provide more flexibility to defined contribution plan administrators to correct for both under-contributions and over-contributions.
The rules in the Income Tax Act do not currently permit pension plan administrators to accept retroactive contributions to employee accounts under a defined contribution pension plan in order to correct under-contribution errors in respect of prior years. Further, the rules that allow some over-contribution errors to be corrected by refunding the excess to the contributor are difficult to administer.
The amendments will:
- permit certain types of errors to be corrected by way of additional contributions to an employee’s defined contribution account to compensate for an under-contribution error made in any of the preceding five years, subject to a dollar limit;
- permit plan 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 employee or employer who made the contribution; and
- simplify the reporting requirements by requiring plan administrators to file a prescribed form in respect of each affected employee, rather than amend T4 slips for prior years.
These measures would apply in respect of additional contributions made, and amounts of over-contributions refunded, in 2021 and subsequent taxation years.
Enhanced trust reporting requirements
The draft amendments push back the date that certain trusts must provide enhanced reporting to the Canada Revenue Agency. This means that health and welfare trusts (HWTs) that convert to employee life and health trusts (ELHTs) on or before January 1, 2022 are no longer potentially subject to these requirements.
The enhanced trust reporting requirements, first announced in 2018, require certain trusts to provide additional beneficial ownership information on an annual basis. The draft legislation exempts ELHTs from these requirements, but not HWTs.
Under the prior version of the draft legislation, the new reporting requirements were to come into effect for the 2021 tax year. This created a one year period where HWTs that converted to ELHTs effective January 1, 2022 would be subject to the enhanced reporting requirements. That is, HWTs would have had to provide the additional beneficial ownership information for the 2021 tax year prior to converting to ELHTs for the 2022 tax year.
Fortunately, the new draft legislation eliminates this one year stub period. The date that certain trusts must start providing enhanced reporting has been delayed and the requirement now applies to taxation years that end after December 30, 2022. As such, HWTs that did not convert to ELHTs for the 2021 tax year, will not be subject to the enhanced trust reporting requirements (provided they convert to an ELHT for the 2022 tax year).
Electronic Information Returns
The amendments will allow issuers of T4A (Statement of Pension, Retirement, Annuity and Other Income) and T5 (Statement of Investment Income) information returns to provide them electronically without having to also issue a paper copy and without the taxpayer having to authorize the issuer to do so. This measure would apply in respect of information returns sent after 2021.
If you have any questions about these proposed changes to the Income Tax Act, please contact a member of our Pensions and Employee Benefits Group for more information.
Lawson Lundell's Pension and Employee Benefits Law Blog provides updates on the most recent legal developments impacting pension and employee benefit plans. We cover a range of topics, including recent case law and changes to relevant provincial and federal legislation.
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