Federal Budget 2019 – Something for (Almost) Everyone?
Date: March 22, 2019
On March 19, 2019, the federal government tabled its 2019 Budget, “Investing in the Middle Class.” This is an election year, and there is a wide array of initiatives sprinkled throughout the Budget, covering many groups and sectors. There is something for (almost) everyone. In this FTR Now, we focus on the key employment, labour, executive compensation, pension and employee benefits announcements that will be of most interest to employers, human resources professionals, plan sponsors and administrators.
Pension and Employee Benefits
New Annuities Products
Recently, there has been much concern expressed about retirees outliving their savings as Canadians live longer and defined benefit plan coverage continues to decline. Two announcements appear designed to respond to these concerns. Starting in 2020, the Budget proposes to amend the Income Tax Act (ITA) to permit two additional types of annuities: (1) Advanced Life Deferred Annuities (ALDAs); and (2) Variable Payment Life Annuities (VPLAs). The Budget outlined some of the conditions that will apply, with additional details to be provided in draft legislative amendments that will be released for public comment.
Advanced Life Deferred Annuities (ALDAs)
Unlike existing annuity products that can also be purchased with funds transferred from retirement savings vehicles, annuity payments under an ALDA can begin at any time before the end of the year the annuitant turns age 85, rather than the end of the year the annuitant turns age 71. Funds held in a registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), a deferred profit sharing plan (DPSP), a pooled registered pension plan (PRPP), or the defined contribution (DC) component of a registered pension plan (RPP) may be used to purchase an ALDA, and the ALDA can be held as an investment of an RRSP or a RRIF.
The value of an ALDA will not be included for the purpose of calculating the minimum annual RRIF withdrawal amount. In addition, lump sum benefits payable on the death of an ALDA annuitant (if any) to a beneficiary who is a qualifying surviving spouse, common-law partner, or financially dependent child or grandchild will be eligible for a tax-deferred roll-over to the beneficiary’s RRSP or RRIF.
Not more than 25% of a single registered plan can be used to purchase an ALDA, and there will be a comprehensive lifetime purchase limit of $150,000 from all qualifying plans. This lifetime limit will be indexed to inflation for each tax year following 2020. Purchases of ALDA contracts in excess of the prescribed limits will result in a tax of 1% per month on the excess portion.
ALDA contracts will be required to permit a refund in the event that the lifetime ALDA limit of the annuitant is exceeded, as well as additional prescribed requirements. These requirements include that payments under the ALDA must be equal and periodic subject to certain exceptions for indexation and survivor benefits. There are also rules governing payment frequency and death benefits. Annuity contracts that do not comply with the ALDA rules will be subject to the existing ITA rules regarding annuities.
Variable Payment Life Annuities (VPLAs)
VPLAs will allow PRPPs and DC RPPs a new opportunity to provide annuity payments directly from the plan fund, instead of requiring members to purchase annuities outside the plan. To do so, the administrators of these plans must establish a separate annuities fund under the plan to receive transfers from members’ accounts to provide VPLAs. A minimum of 10 retired members will be required to participate in a VPLA arrangement. Once established, a VPLA arrangement will be able to provide members with annuity payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of the participating members.
Employees and employers will not be able to make contributions directly to these underlying annuities funds. There will be an equal and periodic rule with exceptions for indexation, death benefits and the adjustments to payments to reflect mortality and investment performance.
VPLAs will be required to comply with existing tax rules, including the requirement that annuity payments commence by the end of the calendar year in which a member attains age 71. The Budget notes that the government will consult on potential changes to the Pension Benefits Standards Act, 1985 (PBSA) to accommodate the introduction of VLPAs and acknowledges that provincial pension legislation may need to be amended to do the same.
Retirement Income Security
The insolvencies of companies like Nortel and Sears and their underfunded pension plans garnered much media attention. Following the recent consultations on various measures to strengthen retirement income security announced in last year’s Budget, Budget 2019 outlines the initiatives the government intends to pursue in order to better protect pensions in the event of an employer’s bankruptcy. The proposed changes include amendments to the Companies’ Creditors Arrangement Act and the Bankruptcy and Insolvency Act to increase transparency by imposing an obligation of good faith on those involved in these proceedings, and broader powers for courts to review payments made to executives during the period preceding insolvency.
Although the Budget does not announce a new super-priority for pension plan deficits, it does propose to require a wound-up federally regulated pension plan provide the same pension benefits as when it was ongoing. Details on how this requirement would function in the event of a bankruptcy when the pension plan is in a deficit position were not articulated in the Budget.
Amendments are also proposed to the Canada Business Corporations Act. Federally incorporated businesses would be explicitly enabled to consider the interests of workers and pensioners in corporate decision-making, and required to disclose policies related to workers, pensioners and executive compensation or provide an explanation for not having such policies in place. The proposed legislative amendments would also require federally regulated firms that are publicly traded to hold non-binding shareholder votes on executive compensation and disclose the results.
There is also funding for pension research by the National Pension Hub for Pension Knowledge & Research, whose objectives include producing objective pension-focused and industry-relevant research and insights. Over three years, $150,000 will be allocated to research focused on improving retirement savings outcomes and developing solutions to pension challenges. $12.5 million over 10 years was also announced for the Global Risk Institute to fund research into developing new approaches to financial risk management.
Restrictions on Pensionable Service under Individual Pension Plans (IPPs)
IPPs are defined benefit (DB) pension plans with fewer than four members that are most often used by business owners in respect of their own employment. There have been concerns that some IPPs are being used in a manner for which they were not intended. The Budget seeks to end the practice of individuals creating new private corporations that sponsor IPPs for the sole purpose of receiving the commuted value of a DB pension accrued in respect of service with a prior employer on a tax-deferred basis.
Normally, when a member of a DB pension plan terminates employment with a participating employer, all of the member’s accrued benefits can be transferred to another DB plan on a tax-deferred basis. This avoids the maximum transfer value limit (MTV Limit), which applies when the commuted value of such benefits are transferred to a locked-in retirement savings plan, a RRSP, or a defined contribution pension plan, etc. Any portion of the commuted value amount over the MTV Limit is paid in cash, less withholding taxes.
The Budget seeks to amend the ITA to prohibit IPPs from recognizing past service with an employer who does not participate in the IPP as pensionable service. As a result, the transfer of commuted value amounts into an IPP will be treated as a non-qualifying transfer in most cases, and will require the transferred amount to be treated as income in the year of transfer. This change will apply in respect of pensionable service credited under an IPP following March 19, 2019.
Limited Stock Option Deduction
During the last election, the Liberal campaign platform proposed changes to the tax rules governing stock options. After negative feedback from the business community, that promise was put on hold. However, the Budget revives the changes, albeit with a somewhat narrower application.
Employees who receive qualifying stock options are eligible for a deduction that effectively results in the difference between what the employee pays for the options at exercise and the sale price being taxed like a capital gain. A cap will be introduced to limit this deduction on stock options for “high-income individuals employed at large, long-established, mature firms.” Going forward, for these individuals the preferred tax treatment will apply only to annual option grants of up to $200,000, based on the fair market value of the underlying shares at the time of the grant. “Start-ups and rapidly growing Canadian businesses” will not be affected by the new limit. The Budget states that this will align Canadian tax treatment of stock options with that of the United States and the public policy goal of supporting younger and growing Canadian businesses.
The Budget did not contain details regarding how the two categories of businesses will be defined, but confirmed that options granted prior to the announcement of the legislative proposals to implement any new regime will not be affected. It also appears that options that exceed the new limit and are not eligible for the employee deduction will be eligible for a corporate tax deduction. The government will release further details on this proposal before the summer.
National Pharmacare Strategy
The Budget does not establish a national pharmacare program but does take steps towards its implementation. This follows the recommendations found in the interim report of the Advisory Council on the Implementation of National Pharmacare (Advisory Council) released on March 6, 2019. The creation of the Advisory Council was announced in last year’s Budget and the current Budget confirms that the government will move ahead with creating the following three components of its national pharmacare strategy :
- The Canadian Drug Agency – a new agency that will assess the effectiveness of new drugs and take a coordinated approach to negotiating prescription drug prices.
- A National Formulary – a new list of prescribed drugs that would form the baseline for harmonizing drug coverage across Canada.
- A National Strategy for High-Cost Drugs – a new plan that will be established to ensure that patients with rare diseases have better and more consistent coverage for their treatments.
Two announcements will affect federally-regulated pension plans:
Annuity Discharge – Consistent with a number of provincial jurisdictions, the Budget indicates that the PBSA will be amended to provide a discharge to pension plan administrators when annuities are purchased through a regulated life insurance company.
Missing Members – Legislative amendments will be also be made to the PBSA, the Bank Act, the Bank of Canada Act, and the Trust and Loan Companies Act to expand the scope of the unclaimed assets framework to include unclaimed pension balances from terminated federally regulated pension plans.
Various Other Tax Measures
- Medical Expense Tax Credit (METC) – Amounts paid for medicinal cannabis are eligible for the METC, which provides a 15% non-refundable tax credit to certain taxpayers who face above-average medical expenses. The Budget includes amendments to the METC rules under the ITA recognizing that, since October 17, 2018, cannabis is regulated under the federal Cannabis Regulations. The Budget also indicates that the government will be reviewing the eligibility of fertility-related medical expenses for the METC.
- Salary Overpayments – The Budget confirmed the government’s intention to proceed with previously announced measures to support employees who must reimburse a salary overpayment to their employers due to a system, administrative or clerical error.
- Conversions of Health and Welfare Trusts (HWTs) – The Budget confirmed that the government will move forward with the income tax measures announced in Budget 2018 to facilitate the conversion of HWTs, which are not explicitly recognized in the ITA, to Employee Life and Health Trusts, which are recognized. No timetable for the amendments was given.
- SMEPs – The ITA will be amended to clarify that employers and employees cannot make contributions to specified multi-employer pension plans (SMEPs) in respect of workers after the end of the year they reach age 71 or if they are receiving a pension from the plan, as is the case for other registered pension plans. These changes will apply in respect of collective bargaining agreements entered into after 2019, in relation to contributions made after the date the parties enter into the agreement.
Canada Pension Plan
The Budget proposes to amend the Canada Pension Plan (CPP) to start CPP pensions automatically for workers who in 2020 are age 70 or older and who have not yet applied to begin receiving their CPP pension. Auto-enrolment options have previously been implemented for Old Age Security and Guaranteed Income Supplement benefits. The Government also proposes to extend the allowable period during which a person can stop receiving CPP benefits from six months to one year.
Service Canada and Canada Revenue Agency Service Improvements
A number of initiatives to improve service delivery by the Canada Revenue Agency (CRA) and Service Canada were announced in the Budget.
Employment and Social Development Canada, which delivers services through Service Canada, will receive funding to modernize phone and information technology platforms for Service Canada’s call centres, and other improvements.
The Canada Revenue Agency will be reorganized to allocate resources to the following:
- improved digital services to provide file updates and allow users to track the progress of their file online,
- more timely dispute resolution that is consistent with published service standards, and
- additional auditors to assist new unincorporated business with the tax assessment prior to filing their tax returns.
Based on previous service review initiatives, the CRA will also hire additional staff to process adjustments to T1 returns more quickly and establish a permanent dedicated telephone support line for tax service providers.
The Budget also announced that effective January 1, 2020, the CRA will establish a new process for sending requirements of information to banks and credit unions electronically rather than by registered mail. This change in delivery method will only occur if a bank or credit union notifies the CRA that it consents to this method of service.
Support for Employment Training
The Budget outlines a new initiative aimed at providing support to workers in obtaining additional skills and training throughout their careers. The Canada Training Benefit includes a refundable tax credit and employment insurance (EI) benefits to facilitate short-term breaks from work to pursue training:
|Training Credit||EI Training Support Benefit|
|Starting in 2020, workers accrue a refundable tax credit of $250 per year to a lifetime maximum of $5,000.
Requirements: Workers aged 25-64 with $10,000 in earnings from work (including maternity or parental leave benefits) and income below approximately $150,000 ($147,667 in the 2019 tax year).
Can be applied towards up to 50% of fees at universities, colleges and other eligible institutions providing occupational skills training.
|Expected to be launched in late 2020
Requirements: 600 hours of insurable employment in the qualifying period.
EI benefits are payable at 55% of average weekly insurable earnings during a 4 week leave of absence. The 4 weeks can be taken within a 4 year period.
There will be an EI Small Business Premium Rebate available to employers paying $20,000 or less in EI premiums in order to offset any increase in EI premiums associated with the EI Training Support Benefit.
The government indicated that it will consult with provinces and territories regarding the creation of new job-protected leaves of absence under employment legislation to coordinate with the proposed Canada Training Credit and EI Training Support Benefits but the Budget does not indicate the timing of when it would move to amend the Canada Labour Code to create such a job-protected leave. The Budget does indicate that the government also intends to consult with workers, employers, educational institutions and training providers on this initiative.
The government proposes to amend the Employment Equity Act and its Regulations to reduce wage gaps through the introduction of pay transparency for federally regulated employers.
Employment in Various Sectors
The Global Talent Stream, introduced in Budget 2016 as a two-year pilot project, will become permanent with an investment of $35.2 million over five years. It was originally introduced to help Canadian businesses recruit global talent when Canadian workers are not available.
A new Federal Strategy on Jobs and the Visitor Economy will be developed. Over two years, $58.5 million will be invested in a Canadian Experiences Fund which would assist Canadian businesses or organizations to grow the tourism industry, identified in the Budget as a significant source of jobs.
Further to the introduction of Bill C-81, the Accessible Canada Act, the government proposes to work with stakeholders and Canadians with disabilities to create new accessibility standards and regulations that will apply to the federal sector, including employers in the banking, telecommunication and transportation sectors as well as the federal public service.
Organizations which support persons with intellectual disabilities and Autism Spectrum Disorders will be provided with $12 million to improve the employment outcomes of these persons.
The Canadian National Institute for the Blind will be provided with $1 million to help connect persons with visual impairments with small- to medium-sized employers.
Shared Services Canada will be provided with $13.7 million over five years to help identify, remove and prevent technological barriers in federal workplaces
Gender Equality and Diversity
New requirements will be introduced requiring federally regulated financial institutions to disclose policies aimed at promoting greater diversity on boards and in senior management.
The Department for Women and Gender Equality will be provided with $160 million over five years to address systemic barriers which impede progress for women.
The government proposes to introduce legislation, and amend existing legislation, relating to a new “critical cyber systems framework” to address issues of cyber security
The CanCode program, which helps youth develop coding and digital skills and provides training support for teachers, will be provided with $60 million over two years.
The government will provide $824 million over ten years to support Indigenous students to have access to post-secondary education.
Over five years, $631.2 million will be dedicated to expand the Student Work Placement Program (Program), which currently gives post-secondary students in STEM (science, technology, engineering and math) programs paid work experience, to include fields outside STEM and to provide up to 20,000 new work placements across Canada by 2021-22. Employment and Social Development Canada will be provided with an additional $150 million over four years to create partnerships with businesses to create a further 20,000 work placements. Under this Program, businesses may be eligible for a partial hiring wage subsidy.
- Regulatory frameworks will be modernized through the introduction of “regulatory roadmaps” to better align with “industry realities,” and through harmonizing regulations between jurisdictions.
- A new Anti-Racism Strategy will be developed.
- A national campaign to promote skilled trades as a career choice for young people will receive $6 million in funding and will be tasked with developing a strategy to support apprentices and those employed in skilled trades.
Some of these initiatives will be welcomed more than others. With an election looming, it is unclear how many of the Budget announcements will be ultimately implemented. Should you have any questions or require further information, please contact any member of our PBEC group or your regular Hicks Morley lawyer.
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