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Pensions & Benefits Law A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

Federal Pension Relief: Provincial Steps Needed

Posted in Canada Pensions & Benefits Law, DB Plan Funding, Pension Reform

Once again the “pension crisis” hits the front page, with The Globe and Mail reporting on federal Finance Minister Jim Flaherty’s announcement that the government is considering changes to the Income Tax Act that would permit pension plan sponsors to contribute more to their pension funds. The proposal described by the Globe would essentially permit sponsors to accumulate larger surpluses in their pension funds, by continuing to allow tax deductions for employer contributions when the surplus grows beyond the threshold currently set out in the legislation.

In the area of pensions as in so many other aspects of Canadian society, the issue of provincial jurisdiction of course comes into play, the Canadian confederation being what it is. Most registered pension plans in Canada are governed not only by the federal Income Tax Act but also by provincial pension standards legislation (except for pension plans of federally-regulated businesses such as banks and railways). Without corresponding changes to the provincial legislation, particularly in Ontario which is home to the majority of Canadian plans, this proposal from the federal government may not in fact achieve its intended goal.

The fact is that under Ontario’s Pension Benefits Act, if a pension plan is terminated in part or in full, then any surplus assets must be distributed from the plan, once all promised pension benefits have been paid out to the members. Even if the employer is clearly legally entitled to the surplus based on the plan documents, if it wishes to keep any part of the surplus for itself, the Ontario legislation requires that the employer obtain the consent of at least two-thirds of the affected active plan members as well as at least two-thirds of the affected “former members”, namely the pensioners. Practically speaking, such member consents are difficult if not impossible to obtain without the employer offering to share a portion of the surplus with the members.

Faced with such a scenario, many employers may be reluctant to continue contributing to a pension plan that is already in surplus, even though it may provide the members with greater security in uncertain economic times, if the employer knows that it will have to give away part of that surplus if the pension plan is ever terminated in whole or in part.

Minister Flaherty’s parliamentary secretary was absolutely correct to state that the government was looking to do what it could, within its jurisdiction. Without more from the Ontario government, however, very few Ontario employers may take advantage of the revised tax rules, if the proposed changes are made to the federal Income Tax Act.