People Mentioned
Partner, Pensions and Benefits, Toronto
Defined contribution pension plan administrators may soon find a lightened load when dealing with historical under and over contributions, should proposals introduced in the federal budget become legislation. According to a recent article in Benefits Canada by Julius Melnitzer, the Income Tax Act currently doesn’t contemplate these issues, nor provide remedies to correct them. Melnitzer spoke with Andrea Boctor, Chair of Osler’s Pension and Benefits Group. about the issue.
“As things stand, the cost of fixing these mistakes can often exceed the amount of the mistake itself,” says Andrea.
Right now, the Act provides no relief when the under contribution is discovered in a subsequent year. The employer’s only option is to amend the plan to provide for catch-up contributions, or make payments outside the plan. Either way, the catch-up amount counts toward the maximum contribution limit for the year in which it’s actually made.
Catch-ups for under contributions, however, would be limited to the preceding five years, subject to a cap as yet unspecified. The catch-ups would reduce the registered retirement savings plan contribution room for the taxation year following the correction. This could work especially well for high earners.
The budget also proposed refunds for over contributions in the preceding five years. The refunds would restore the contribution room for the taxation year in which the refund is made.
Andrea points out that the way in which the legislation deals with interest could also be meaningful. “In the case of under contributions, for example, tax-exempt interest should have been accruing on the proper amount.”
Should these proposals become legislation, federal and provincial standards legislation could require amendment. In particular, the federal proposals don’t affect the current requirements for provincial regulatory consent in the case of over contributions. In this case, changes to provincial legislation or policies may be necessary.
Read Julius Melnitzer’s full article, “Federal budget promising relief for DC pension plan under, over contributions,” published May 6, 2021 in Benefits Canada.
People Mentioned
Partner, Pensions and Benefits, Toronto