Ottawa needs to change federal tax rules so that they accommodate single-employer target benefit plans (TBPs), according to a C.D. Howe Institute report.
In The Taxation of Single-Employer Target Benefit Plans – Where We Are and Where We Ought To Be, authors Barry Gros, Karen Hall, Ian McSweeney and Jana Steele propose a tax treatment for single-employer TBPs that is consistent with the existing tax regime.
“Many policy-makers and regulators across Canada are in the process of making the required changes to pension standards legislation that would recognize single-employer TBPs,” says Steele.
Gros adds: “We encourage Ottawa to amend the tax rules to address the evolving Canadian pension landscape.”
Read: The myths of target benefit plans
A lot of employers have been looking for alternatives beyond traditional pension arrangements to better manage their pension risks and those of plan members.
Many find DB plans too risky and expensive, since they promise predetermined pension amounts that may not be sustainable, particularly during times when the economic and demographic environment is unfavourable. DC plans aren’t ideal either, since the pension payout is unknown and will depend entirely on contributions, investment returns and how long the individual will live. TBPs constitute an attractive hybrid of DB and DC plans in which employer and employee contributions are fixed to fund target pension payouts.
Read: Do target benefit plans reduce costs and risk?
The authors offer a blueprint of how tax rules can be changed to better accommodate TBPs.
“Until federal changes are made, uncertainty surrounding the tax treatment of TBPs will continue to hinder their adoption by employers and employees,” says Hall.
The report is available on the C.D. Howe Institute’s website.
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