Department of Finance Releases Draft Amendments to the Income Tax Act Regarding Defined Contribution Pension Plans
February 24, 2022
On February 4, 2022, the Department of Finance released draft legislation that will, subject to certain conditions, permit administrators of defined contribution (“DC”) pension plans to correct past contribution errors. The proposed amendments can be accessed at https://fin.canada.ca/drleg-apl/2022/ita-lir-0222-1-eng.html.
The current Income Tax Act (the “ITA”) rules governing DC pension plans do not allow for “catch-up” contributions to make up for contributions lost as a result of errors in prior years (either because the member was not enrolled in the plan, or because the employer under-contributed to the plan). By contrast, the ITA provisions governing defined benefit pension plans do permit adjustments to benefits accrued in past taxation years, including to correct past errors.
The proposed amendments will only apply to DC plans that have ten or more members, or to DC plans in respect of which no more than 50% of the contributions made to the plan are for the benefit of connected persons or employees who earn more than 2.5 times the CPP earnings cap (or “YMPE”). Corrections will only be permitted for contribution errors made in the previous five years and will be subject to a cap.
Corrections for prior year contribution errors will result in pension adjustment (“PA”) corrections for affected members, impacting their otherwise available RRSP contribution room. Where the corrections give rise to a negative RRSP contribution balance, the member will be unable to make additional RRSP contributions until the member has earned sufficient additional contribution room to offset this negative balance. Corrections for prior year overcontributions will restore additional RRSP contribution room for affected plan members. Such corrections will be reported to the CRA on a prescribed information return, rather requiring amended T4 slips to be issued for applicable years.
If passed, the amendments will come into force on January 1, 2021.
Finance Canada is inviting comments on the draft amendments, which must be submitted by March 7, 2022.
Pension and Benefits