Written By Jordan Fremont, Hennadiy Kutsenko and Ben Sissons
This blog was originally published on July 17, 2023, and has been updated to reflect further developments.
On June 22, 2023, Bill C-47 received royal assent, implementing a variety of amendments to the Income Tax Act (Canada) (ITA) and its regulations (ITA Regulations) tabled as part of the 2023 Federal Budget. As we previously discussed in our blog, Fixing Contribution Errors for Defined Contribution Pension Plans, this includes amendments which permit retroactive contributions to defined contribution (DC) registered pension plans, a long anticipated change originally introduced as part of the 2021 Federal budget.
As a reminder, the ITA and ITA Regulations previously did not permit retroactive contributions to DC registered pension plans. Instead, DC contribution error corrections made in a year were limited by that year's annual contribution limit. The ITA amendments stemming from Bill C-47 provide greater flexibility—permitting corrective contributions in respect of an individual plan member to be made in respect of any of the previous ten calendar years, subject to certain limitations. Specifically, a "permitted corrective contribution" (PCC) must relate to a failure to enroll an individual as a member of a plan or to make a required contribution in accordance with the plan's terms. Further, PCCs in respect of an individual are limited to the lesser of:
- the difference between (1) the total of missed contributions made over the immediately preceding ten calendar years, together with the amount of interest thereon (as required under pension standards legislation, or, in any event, not to exceed the applicable fund rate of return during the relevant period of missed contributions), and (2) the amount of PCCs previously made in respect of that individual for that period; or,
- 150 percent of the applicable DC (money purchase) dollar limit for the year in which the PCCs are made, less the total amount of PCCs previously made in respect of that individual.
The plan administrator is required to notify the Canada Revenue Agency (CRA) within 120 days of the date that the PCC is made to the plan in respect of an individual member by filing with the CRA a completed Form T215.
PCCs made in respect of under-contributions will reduce an individual's registered retirement savings plan (RRSP) deduction limit for the following taxation year. If this results in a negative balance of unused RRSP contribution room, the individual would be prohibited from making new deductible RRSP contributions (and may be subject to tax on RRSP excess contributions) until the individual withdraws the excess contributions or earns a positive RRSP deduction limit.
To facilitate PCCs that may be required to be made by employees, the amendments permit employers to enter into written agreements for such employee PCCs to be made in installments. In such event, the ITA deems the PCCs to have been made in full on the date the written commitment is entered into for the purpose of both the reporting requirements under the ITA Regulations and for determining the employee's "net past service pension adjustment", which would have the effect of reducing the employee's RRSP contribution room for the following taxation year.
Where a contribution made to a registered pension plan exceeds what is required or permitted, such contribution will generally cause the registration of that plan to be revocable. Remediation of this issue generally requires that excess contributions be withdrawn from/refunded by the plan, and that related reporting (i.e., of pension adjustment information) be corrected. Previously this would typically have meant making corrections to the pension credits that had been reported for each year in respect of which an excess contribution had been made.
The Bill C-47 amendments to the ITA and ITA Regulations introduced a simpler "pension adjustment correction" (PAC) process, which restores registered RRSP room for each year in which excess contributions are refunded, subject to certain limits. In particular, a PAC in respect of an individual can only be calculated and reported on excess contributions that were made in the 10 years immediately preceding the calendar year in which the plan refunds excess contributions.
PACs are to be reported by the plan administrator by filing a T10 Pension Adjustment Reversal (PAR) or Pension Adjustment Correction (PAC) slip with the CRA within specified deadlines. Specifically, if a refund of excess contributions occurs in the first, second or third quarter of a calendar year, the T10 slip would be required to be filed no later than 60 days after the end of the quarter in which the refund occurs. If the refund occurs in the fourth quarter of a calendar year, the prescribed information return would be required to be filed by January 31 of the following calendar year.
Refunds made in respect of over-contributions will result in the restoration of an individual's RRSP deduction limit for the year in which such refund is made. PACs form part of an individual's overall pension adjustment reversal, and by restricting the PAC amount by the lesser of amounts that would exceed the money purchase limit for the year or 18% of the employee's compensation from the employer, the PAC calculation effectively limits the amount of a PAC to the amount of unused RRSP deduction room that was actually reduced by the reported pension adjustments.
The amendments are deemed to have come into effect retroactively as of January 1, 2021 (the Effective Date), and as a result, any PCCs or PACs that individuals or employers have already made after the Effective Date but prior to the date these amendments received royal assent may fall outside of this 120-day notice period. To address this, a 60-day window has been instituted from the date Bill C-47 received royal assent for plan administrators to report PCCs or PACs that they have already made within this window to CRA. Plan administrators who have made such PCCs or PACs but have not already notified the CRA must do so by no later than August 21, 2023.
The new PCC and PAC rules will assist sponsors and administrators of DC pension plans with addressing contribution errors. However, plan sponsors and administrators will need to be mindful of the related limits, reporting requirements, as well as the restrictions or regulatory approvals that might need to be satisfied under applicable pension standards legislation.
If you have any questions relating to these amendments, a member of the Bennett Jones Pensions & Benefits group would be pleased to discuss.