In a new white paper, the Association of Canadian Pension Management is urging the federal government to reform the Income Tax Act rules for registered pension plans.
In the ACPM’s view, ITA reforms are required to build on government initiatives aimed at increasing retirement savings by updating the tax rules released in 1992 so they better reflect today’s socioeconomic environment and Canadians’ increased life expectancy. The paper outlines seven recommendations specific to ITA and tax policy reforms related to pension plans that would help meet these objectives.
“We’re trying to reflect the fact that things have changed since the early 1990s, both in terms of the economic conditions and realities, [such as] life expectancies, that were codified in the act in the early 1990s,” says Todd Saulnier, chair of the national policy committee for the ACPM and a principal at Mercer.
“A lot of those code applications need to be updated. So that’s No. 1. And No. 2, there were new plans that have come to be in the tax code that really haven’t caught up to those new types of plans — we’re thinking, in particular, shared-risk plans and target-benefit plans, which are popping up in different parts of the country. And the tax code really hasn’t thought through how those should actually work.”
Update factor of nine to 12
The first recommendation is updating the factor of nine to 12. Raising the factor, the report said, would change the Canadian retirement system because:
- The money purchase limit would increase. In 2019, for example, it would have increased from $27,000 to $36,000; and
- The registered retirement savings plan deduction limit and pension adjustment calculation rule for defined contribution plans, in percentage of earnings, would increase from 18 per cent to 24 per cent. This would allow DC plans and RRSPs to be on similar ground as the defined benefit plan model.
“The pension adjustment factor going from nine to 12 would be a huge step in labelling capital accumulation plans to be on a more equal footing with defined benefit plans,” says Saulnier. “And because there’s a huge gap between what you can put into a defined benefit plan in terms of contributions, and what you can put in a CAP, with that factor of nine, you’re limited to 18 per cent total compensation into a CAP, which is, with today’s longevity rates, mortality rates and economic conditions, nowhere going to be equivalent to that defined benefit pension plan.”
Repeal regulation 8517 limits
The second recommendation proposes removing the limits in regulation 8517. According to the ACPM, “given registered pension plans are tax-deferred arrangements, this forcing of immediate taxation on the lump sum versus deferred taxation of the benefits received during retirement is punitive.”
In addition to repealing section 8517 of the ITA regulations, the ACPM also suggests that pension plans maintain special status as arrangements with taxation deferred to retirement years and that plan members who exercise portability rights shouldn’t be disadvantaged in comparison to those who choose to leave pension entitlements with former employers.
Tax reforms that address increased longevity
The paper also outlines two recommendations regarding longevity. First, it suggests increasing the mandatory retirement income commencement age from 71 to 75 because longer life spans will ultimately change how people live and save. Second, it recommends permitting longevity pooling through group self-annuitization arrangements.
“At the very least, consideration should be given to allowing provinces to adopt a common VPLA framework for those who access it through a [pooled registered pension plan],” said the paper.
Tax reforms to assist CAPs
ACPM also believes there’s an opportunity and need to develop decumulation products and services that will produce better outcomes and assist CAP sponsors in correcting errors in plan administration that occasionally occur.
Tax reforms to accommodate target-benefit plans
Rather than forcing target-benefits plans to be treated as DB plans under the tax rules, the ACPM believes administrators of these plans should have the choice to adopt DB or DC tax rules, with some modifications, based on their individual sustainability levels and circumstances. “In our view, TBP administrators should make their election at the time of establishment or conversion and be permitted to apply to the minister of finance or the [Canada Revenue Agency] to elect the alternative treatment similar to the rules currently in effect for specified multi-employer plans.”
Reform annuity rules: deferred annuitization
The ACPM also noted it previously recommended the ITA be amended to allow individuals to allocate a portion of their deferred tax savings beyond the end of the year they reach age 71. It said it’s pleased with the 2019 federal budget announcement on advanced deferred life annuities “and look forward to more details on these new vehicles.”
Other tax reforms for registered plans
The ACPM’s final recommendations include amending regulations around pre-retirement death benefits under DB plans; reviewing minimum withdrawals from registered retirement income funds; and changing tax rules relating to tax-free savings accounts.
Tax rules need to be updated to address current and emerging challenges, including low interest rates and increased longevity projections, concluded the paper. “The ITA rules applicable to registered plans must be modernized and updated to keep pace with today’s socioeconomic environment, Canadians’ increased life expectancy and innovations in retirement plan design.”