The Ontario government has passed legislation that reduces the regulatory burden for certain individual pension plans (IPPs).
Certain IPPs and designated plans will be exempt from requirements under Ontario’s Pension Benefits Act (PBA) — notably, minimum funding requirements.
The changes were introduced in the Progressive Conservative government’s 2019 fall fiscal update and passed earlier this month.
Reducing the regulatory burden will likely lead to more IPPs being implemented. Ontario’s changes are especially welcome in the Covid-19 environment, as many employers try to conserve cash. The new rules mean employers can defer their contributions to a later period.
It is important to understand which plans qualify under the legislation. The new rules allow plans for “connected” people to seek exemption. A “connected” person holds at least 10% of any class of shares. The definition for a “connected” person also includes someone who does not deal at arm’s length with the employer.
With the change, Ontario is joining Alberta, British Columbia, Manitoba and Quebec, which already exempt plans for connected persons from pension legislation. (New Brunswick recently introduced provisions excluding IPPs as defined in the Income Tax Act, which requires at least one plan member to be related to the employer.)
What are the most significant effects of Ontario’s legislation?
Pension plans are governed by tax legislation and pension standards legislation. The Income Tax Act places limits on what may be contributed to a pension plan. The PBA determines whether or not contributions must be made. When a plan is exempt from the PBA, it has considerable freedom as to when contributions are made to the plan.
The PBA contains specific provisions relating to creditor protection, and exempt plans will lose this protection. In the case of insolvency, plan members will have to rely on protection provided under common law for trusts. Other PBA provisions that will no longer apply include having to transfer a portion of the commuted value to a locked-in plan.
For a plan to be exempt, all plan members — including former and retired members and their spouses, as well as others entitled to benefits (for example, someone receiving survivor benefits) — must consent in writing to the exemption.
Let’s use the example of a fictional company, OpCo, which has always been equally owned by Samantha and her parents. Samantha’s parents are already drawing their pensions and are no longer managing OpCo. Their pension plan is an IPP since each of the three are related to OpCo. Each is also “connected” (either because of the size of their shareholding or because they do not deal with OpCo on an arm’s-length basis). Samantha would need her parents’ consent to seek an exemption for the plan. Samantha’s spouse would also have to consent.
How does an existing plan apply for exemption?
There are specific requirements that must be met for an existing plan to become exempt. The opt-out forms must be filed with the Financial Services Regulatory Authority of Ontario (FSRA).
Each person needing to consent must sign the FSRA form, which will acknowledge that, as a result of the exemption, the PBA would not apply to any benefits or entitlements accrued under the pension plan, whether the benefits or entitlements accrued before or after the effective date of the exemption. The spouses of each plan member, former member and retired member must also give written consent.
The exemption will continue even if a member ceases being a connected person. Once a plan has elected to become exempt, only connected persons may join it.
Plans established on or after Dec. 8, 2020 that want to be exempt need only apply for registration with the Canada Revenue Agency. No additional steps need to be taken with FSRA.
Exempt plans will no longer be required to file with FSRA, thus avoiding the annual filing fee (set to increase to $750 in 2021). Plans will still be required to file to the CRA.
Some plan sponsors had chosen to implement hybrid plans, allowing them to choose whether to participate in a defined-benefit or defined-contribution provision in any calendar year. The appeal of these arrangements may diminish, since exempt plans are no longer required to make any contributions.
We remind readers that one of the primary objectives in establishing a pension plan is to maximize the pension accrual, and hence the tax-deductible employer contributions. If there are funding concerns at the outset, establishing a plan may not be appropriate.
Contributions to a defined-benefit provision must be based on an actuarial valuation. For exempt plans where contributions are deferred, the employer will be able to take a deduction made in its fiscal period or within 120 days from the end of the fiscal period. Hence, there is the potential for significant deductions in a later period.
Lea Koiv, CPA, CMA, CA, CFP, TEP, is a tax, pension and retirement expert with Lea Koiv & Associates (firstname.lastname@example.org). William C. Kennedy, FSA, FCIA, is senior vice-president at Lesniewski Moore Consulting Group.