State pensions and mandatory schemes
Do employers and/or employees make pension contributions to the government in your jurisdiction? If so, briefly outline the existing state pension system.
Canada’s public pension system consists of two pillars:
- the Canada or Quebec Pension Plan (CPP and QPP, respectively); and
- the Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits.
The CPP and the QPP are contributory, earnings-related social insurance programmes. Subject to certain narrow exceptions, Canadian employers are required to contribute to the CPP on behalf of their respective employees or, if any of the employees are employed in the province of Quebec, are required to contribute to the QPP. Employees and the self-employed are also required to contribute to both plans. Both employer and employee contributions to the CPP and the QPP are based on pensionable earnings, up to the maximum contribution limits set out under the CPP and the QPP, as applicable. The maximum pensionable earnings and contribution rates under the CPP and the QPP may vary year to year and are fixed in advance by the Canadian and Quebec governments, respectively. In 2017 the employer and employee CPP contribution rate is 4.95% of earnings, to a maximum pensionable earnings of C$55,300, whereas the employer and employee QPP contribution rate is 5.4%, to a maximum pensionable earnings of C$55,300.
Under the CPP and the QPP, employees and their eligible beneficiaries may be entitled to retirement benefits, survivor benefits, death benefits or long-term disability benefits.
Canadians may also be eligible to receive OAS and GIS benefits under the Old Age Security Act; OAS and GIS are government benefits for seniors. No employer or employee contributions are required for either benefit. Entitlement to OAS and GIS benefits is means-based – employment history is not a factor.
Can employers deduct any state pension contributions from their taxable income?
An employer can deduct the CPP and QPP contributions it made on behalf of its employees from its business income.
Are there any proposals to reform or amend the existing system?
The CPP can be amended or reformed only with the consent of the federal government and two-thirds of provincial governments, which represent two-thirds of the population of all provinces. In 2016 the federal government and all provinces, with the exception of Quebec, agreed to reform the CPP significantly. The reforms will be phased in over seven years, from January 1 2019.
As part of the reform, the maximum amount of income subject to the CPP will by increased by 14% to a projected amount of C$82,700 in 2025. In order to fund the enhancements, employer and employee contributions to the CPP will increase from January 1 2019. The increase in contribution rates will be phased in over seven years and consist of:
- an increased contribution rate on earnings below the year’s maximum pensionable earnings, which will be phased in over the first five years; and
- an increased contribution rate on earnings above the year’s maximum pensionable earnings, which will begin to take effect in 2024 and be phased in over two years.
In December 2016 the Quebec government released a discussion paper outlining possible options for enhancing the QPP. As of August 1 2017 no formal announcement had been made.
Other mandatory schemes
Are employers required to arrange or contribute to supplementary pension schemes for employees? If so, briefly outline how the scheme is enforced and regulated.
Canadian employers are not required to arrange or contribute to supplementary pension schemes for employees, but may choose to do so.
Occupational pension schemes
Types of scheme
What are the most common types of pension scheme provided by employers for their employees in your jurisdiction?
The two most common types of pension schemes provided by Canadian employers to employees are defined benefit registered pension plans and defined contribution registered pension plans.
Under a defined benefit registered pension plan, the employee is entitled to a certain benefit at retirement, as defined in the plan document, which is generally based on years of service and earnings. Common benefit formulas under a defined benefit plan include:
- final (or best) average earnings, under which the employee’s benefit is based on the employee’s earnings over the last (or highest paid) years of employment;
- career average earnings, under which the employee’s benefit is based on the employee’s earnings over the entire period of employment; and
- flat benefit, under which the benefit is equal to a fixed amount for each year of service.
Under a defined contribution registered pension plan, the member’s benefit is not defined in the plan document but is based on the contribution formula in the plan document. Under such a plan, the employee plan member’s benefit at retirement is equal to the employee’s contributions made to the plan and the employer’s contributions made on his or her behalf plus (or minus) investment earnings thereon. Employer and employee contributions to defined contribution plans are defined generally as a percentage of the employee’s earnings.
Defined contribution and defined benefit plans are required to be registered under the Income Tax Act and pension standards legislation.
As a result of maximum benefit limits under the Income Tax Act, employers may also provide high-income earners with a supplemental executive or supplemental employee retirement plan (SERP), in addition to a defined benefit or defined contribution registered pension plan. A SERP is often structured as a ‘top-up’ plan, such that the benefits that the employee earns under the SERP are equal to the difference between the benefits that the employee would have been entitled to under the registered pension plan but for the limits under the Income Tax Act and the benefits actually paid under the registered pension plan. Although there are some exceptions, a SERP is not generally required to be registered under pension standards legislation or the Income Tax Act.
In recent years, as a result of legislative changes in certain jurisdictions, some employers have begun to offer target benefit or shared risk plans to their employees. Such plans are similar to defined benefit registered pension plans, in that the plans include a defined formula pursuant to which benefits payable to members at retirement are calculated; however, they have certain differences, including that contributions are fixed and benefits may be reduced if the target benefit cannot be paid.
Is there a statutory framework governing the establishment and operation of occupational pension plans?
The federal government and each province, with the exception of Prince Edward Island, have enacted pension standards legislation pursuant to which minimum standards for the registration and administration of pension plans is defined. The Canadian territories have not enacted pension standards legislation but employees in the territories are subject to federal pension standards legislation. The federal government has also defined certain rules regarding the taxation of pension plan contributions and benefits, as set out under the Income Tax Act.
A defined contribution or defined benefit pension plan must be registered under both the Income Tax Act and the pension standards legislation in the jurisdiction in which the majority of plan members are employed. In other words, if an employer employs individuals in more than one province in Canada, the pension plan must be registered under the pension standards legislation in the province in which most plan members are employed.
Notwithstanding the jurisdiction of registration, if a plan has members employed in more than one jurisdiction, the plan sponsor and administrator must also comply with the pension standards legislation applicable to each member. For example, if the plan is registered in the province of Saskatchewan but has members employed in the province of Ontario, the Pension Benefits Act (Ontario) must be followed with respect to the Ontario members.
What are the general rules and requirements regarding the vesting of benefits?
The rules regarding the vesting of benefits under registered pension plans (defined contribution or defined benefit) are defined under pension standards legislation. Most jurisdictions provide for immediate vesting of employer and employee contributions under pension standards legislation.
An employer must consult the applicable pension standards legislation in the jurisdiction in which the plan member is employed in order to determine the applicable vesting rules.
What are the general rules and requirements regarding the funding of plan liabilities?
The rules regarding the funding of plan liabilities under registered pension plans (defined contribution or defined benefit) are defined under pension standards legislation. An employer must consult the applicable pension standards legislation in the jurisdiction in which the plan member is employed in order to determine the applicable funding rules.
The funding of a defined contribution registered pension plan is based solely on the contribution formula in the plan document. The employer’s obligation to fund a defined contribution registered pension plan is limited to that formula.
The funding requirements under a defined benefit registered pension plan are determined generally by reference to the amount determined by the plan actuary as necessary to fund the benefit defined under the plan. An actuarial valuation report of a defined benefit-registered pension plan must generally be undertaken at least once every three years; if the plan has a funding deficit, a valuation may be required more frequently.
There are generally two types of valuations that affect the funding of liabilities by an employer under a defined benefit registered pension plan:
- a going concern valuation, under which it is assumed that the plan will continue indefinitely; and
- a solvency valuation, under which it is assumed that the plan will wind up on the valuation date.
However, some jurisdictions (eg, Quebec) have recently moved away from requiring a solvency valuation or have introduced temporary solvency funding relief provisions in order to address the difficulties faced by many employers in funding defined benefit plans.
Depending on the funded status of the defined benefit plan, an employer may be required to make only current service payments, which are intended to fund the current service obligations under the plan, or current service and special payments, which are intended to fund any deficit under the plan. In the event of a defined benefit pension plan winding up with a funding deficit, the employer is liable for funding that deficit.
What are the tax consequences for employers and participants of occupational pension schemes?
Subject to certain limits under the Income Tax Act, employer contributions to a defined benefit or defined contribution registered pension plan are deductible. Similarly, subject to certain limits under the act, employee contributions to a defined benefit or defined contribution registered pension plan are deductible.
The benefits paid under a registered pension plan are included in the employee’s income on receipt.
Is there any requirement to hold plan assets in trust or similar vehicles?
The pension standards legislation and Income Tax Act define the manner in which the assets of a registered pension plan must be held and the entity that may hold such assets.
Most pension plans are held through an insurance contract with a company authorised to carry out a life insurance business in Canada or a trust in Canada governed by a written trust agreement pursuant to which the trustees are a trust company or individuals, at least three of whom must reside in Canada and one independent of the employer.
Are there any special fiduciary rules (including any prohibited transactions) in relation to the investment of pension plan assets?
The pension standards legislation defines the standard of care which plan administrators must meet in respect of the investment of plan assets. Although the standard varies between jurisdictions, it is generally high. For example, in Ontario the standard is that a person of ordinary prudence would exercise in dealing with the property of another person, whereas in Alberta the standard is that a reasonable and prudent person would adopt if investing the assets on behalf of a person to whom the investing person owed a fiduciary duty to make investments.
Under Canadian law, a plan administrator is also recognised at common law to be in a fiduciary relationship with plan members and other plan beneficiaries. As a fiduciary, the plan administrator has a number of duties, including to:
- act in utmost good faith;
- act in the best interests of the beneficiaries as a whole;
- not let personal or other interests conflict with the duty owed to beneficiaries;
- not profit from the fiduciary position; and
- hold an even hand between beneficiaries.
Specific rules with respect to the investment of plan assets are also set out in the pension standards legislation. Most provinces have adopted the investment rules set out under the regulations to the federal pension standards legislation. Among other restrictions, that legislation, subject to defined exceptions, restricts the investment of plan assets in related parties.
Is there any government oversight of plan administration and/or insurance coverage for plan benefits in the event of an employer’s insolvency?
Under pension standards legislation, the applicable regulator has the authority to appoint a replacement plan administrator on certain events, including in the event of the employer plan sponsor’s insolvency.
Under Ontario pension standards legislation, employers are required to contribute a defined amount to the Pension Benefits Guarantee Fund (PBGF). The PBGF provides protection, subject to certain maximums and exclusions, to Ontario members and beneficiaries of Ontario-registered pension plans in the event of the plan sponsor’s insolvency. No other jurisdiction in Canada has a similar fund.
Are employees’ pension rights protected in the event of a business transfer?
The treatment of employees’ pension rights on a business transfer depends on whether the transfer is a transfer of assets or shares.
On a sale or transfer of shares, the administration and sponsorship of a standalone registered pension plan (ie, a plan in which there is only one participating employer) is transferred to the purchaser. No regulatory approval is needed for such a transfer. However, if the plan is not a standalone registered pension plan (ie, it is a plan with more than one participating employer) and the other participating employers are not part of the transaction, then the transfer, from a pensions perspective, must be considered and dealt with along the same lines as a sale or transfer of assets.
In the event of a sale or transfer of assets, the purchaser has a number of options for addressing the assets of the pension plan and the pension plan itself, including:
- not establishing a new plan;
- if it has an existing plan, allowing transferred employees to participate in that plan on a future service basis;
- establishing a new plan in which transferred employees can participate on a future service basis without a corresponding transfer of assets and liabilities from the vendor's plan; and
- establishing a new plan in which transferred employees can participate with a corresponding transfer of assets and liabilities from the vendor's plan.
If an asset transfer is considered, particular attention must be paid to the applicable pension standards legislation. Many jurisdictions have specific and detailed rules on plan-to-plan asset transfers and require the prior approval of the pension regulator before assets can be transferred.
The pension standards legislation also provides certain protections to plan members upon the sale of a business, without a corresponding transfer of plan assets. For example, under Ontario pension standards legislation, if an employee who was a member of the seller’s pension plan becomes an employee of the purchaser and an employee of the purchaser’s pension plan, that employee is entitled to credit in the purchaser’s pension plan for the period of his or her membership in the seller’s pension plan for the purposes of determining eligibility for membership in, or entitlement to, benefits under the purchaser’s pension plan and is also entitled to credit in the seller’s pension plan for the period of employment with the purchaser for the purposes of determining entitlement to benefits under the seller’s plan.
Deferred compensation agreements
Deferred compensation plans
Do any special tax rules apply to these types of arrangement?
Under the Income Tax Act, employment income is generally taxed upon receipt. However, there is an exception if an employee is entitled to an amount in the future under a salary deferral arrangement (SDA). An SDA is a plan or arrangement, funded or not, under which a person has a right in a taxation year to receive an amount after the year where it is reasonable to conclude that one of the main purposes for the creation or existence of the right is to postpone tax payable by the taxpayer in respect of salary or wages rendered by the taxpayer in the year or preceding years. The purpose test is interpreted broadly by the Canada Revenue Agency, and it is difficult to challenge this. In addition, an arrangement subject to one or more conditions is still an SDA, unless there is a substantial risk that a condition will not be satisfied. A requirement to remain with the employer for a certain period, such as vesting rules, before a payment will be made under the arrangement is not generally considered to create a substantial risk. If the arrangement in question is an SDA, the deferred amount is subject to taxation to the employee in the year that the right to receive the amount arises rather than in the year that the amount is actually received by the employee.
There are certain exceptions to the SDA rules, as set out under the Regulations to the Income Tax Act, including three-year deferred bonus plans and deferred stock unit plans, provided that certain conditions are met.
Do these types of arrangement raise any special securities law issues?
Yes, if the arrangement involve securities of an issuer.
Securities regulation falls under provincial jurisdiction. Each province and territory has its own securities regulatory body that enforces its respective securities legislation. Subject to certain exceptions, the issuance of securities is subject to the rule that every person or company that distributes a previously unissued security to investors must file a prospectus. The prospectus requirement is intended to protect investors by providing them with a disclosure document necessary to make an informed investment decision. A second key requirement is the registration requirement. Subject to certain exceptions, every person or company that sells securities must be registered (or licensed) to do so in the applicable jurisdiction. This requirement is intended to ensure that those in the business of selling securities have the necessary knowledge.
What are the most common types of share option plan in your jurisdiction? Please outline the rules relating to each scheme.
Share option or stock option plans are one of the most common forms of executive compensation. The features of such plans vary between employers – the characteristics of a particular stock option plan is often dependent on:
- the size of the issuer;
- the employer’s overall compensation strategy;
- market trends; and
- tax planning concerns of employees.
What are the tax considerations for share option plans?
There are no tax consequences to an employee on grant of a stock option. However, an employee may be subject to an income inclusion, under Section 7 of the Income Tax Act, on exercising the option; that income inclusion is an amount equal to the excess of the fair market value of the stock at the time the employee acquires the stock over the price, if any, that the employee paid to acquire the stock. The timing of such income inclusion and availability of any deductions against the income inclusion differs between options offered by Canadian-controlled private corporations (CCPC) and those offered by other issuers. A CCPC is a private corporation that is not generally controlled directly or indirectly by non-resident persons or public corporations.
If the shares in question are not CCPC shares, the taxable benefit described above is included in the employee’s income when the employee acquires the shares. However, under the Income Tax Act, a deduction (the 110(1)(d) deduction) is available to the employee if certain conditions are met, including:
- the exercise price is fixed at a price not less than the fair market value of the share at the time the option was granted; and
- the employee is at arm’s length with the corporation granting the option (and the employer, if the employer and the issuing corporation are different entities) and the share is a prescribed share, as defined in the Regulations to the Income Tax Act (Canada).
If the employee qualifies for a deduction under Section 110(1)(d), only half of the option benefit received by the employee is taxable.
If the shares in question are CCPC shares, the benefit to the employee is not subject to tax until the year in which the employee disposes of the shares. In addition, provided that the employee has not disposed of the shares within two years of acquiring them, the amount of taxable benefit may be reduced by 50% (the 110(1)(d.1) deduction).
Share acquisition and purchase plans
What are the most common types of share acquisition and purchase plan in your jurisdiction? Please outline the rules relating to each scheme.
Stock purchase plans are often made available to employees in order to encourage employee savings and performance. Shares may be made available at fair market value or at a discounted price.
What are the tax considerations for share acquisition and purchase plans?
If shares are made available to employees for purchase at the fair market value, there is no taxable benefit to the employee and the employee pays the full value of the shares. However, if shares are made available to employees at less than fair market value, the difference between the fair market value and the price paid by the employee will be a taxable benefit to the employee.
Phantom (ie, cash-settled) share plans
What are the most common types of phantom share plan used in your jurisdiction? Please outline the rules relating to each scheme.
Phantom share plans are typically offered to employees when, for various reasons, actual shares are not available to be issued or the employer does not wish to issue actual shares. A phantom stock plan is essentially a cash-only bonus plan pursuant to which the amount of cash bonus payable is based on the value of the corporation’s shares at the date the bonus is payable or on the increase in the value of the corporation’s share during a defined period.
There are a number of different types of phantom share plans, including:
- share appreciation rights (SARs);
- restricted share units (RSUs);
- performance share units (PSUs); and
- deferred share units (DSUs).
SARs are designed to provide an employee with a bonus equal to the increase in value of shares over a defined period whereas RSUs, PSUs and DSUs typically involve the granting of notional units equal in value to a defined number of shares and are subject to conditions which must be met before the bonus payment is made. For example, RSUs are typically subject to vesting and continued employment conditions whereas PSUs are typically subject to performance based objectives. Under a DSU, as the name suggests, payment or settlement is generally deferred until certain events, such as death, termination or retirement.
What are the tax considerations for phantom share plans?
A key consideration when designing a phantom stock plan is to avoid the application of the salary deferral rules (SDA) under the Income Tax Act.
Under the Income Tax Act, employment income is generally taxed on receipt. However, there is an exception if an employee is entitled to an amount in the future under an SDA. An SDA is a plan or arrangement, funded or not, under which a person has a right in a taxation year to receive an amount after the year where it is reasonable to conclude that one of the main purposes for the creation or existence of the right is to postpone tax payable by the taxpayer in respect of salary or wages rendered by the taxpayer in the year or preceding years.
There are defined exceptions to the SDA rules under the Regulations to the Income Tax Act; the most commonly used exceptions are the exceptions for three-year deferred bonus plans and DSUs.
Under the three-year deferred bonus plan exception, a plan or arrangement under which a taxpayer has a right to receive a bonus or similar payment in respect of services rendered by the taxpayer in a taxation year will not be considered an SDA if the plan provides for payment of the deferred amount by the end of the third calendar year following the year in respect of which the bonus is earned. RSUs are often structured to have vesting within three years in order to avoid application of the SDA rules.
There is also an express exception under the SDA rules for DSUs, provided that certain conditions are met. Under Income Tax Act Regulation 6801(d), an arrangement will be exempt from the application of the SDA rules if it meets the prescribed conditions, including that:
- payments may only be received after retirement, termination of employment or death (ie, a triggering event);
- payments must be made before the end of the calendar year following the calendar year in which any of the triggering events occurred;
- the payment amount must be determined on the basis of the fair market value of the shares of the employer corporation at a time within a period that begins one year before the triggering event and ends at the time the amount is received; and
- there can be no guaranteed minimum payment under the plan.
Are companies required to consult with employee unions or representative bodies before launching an employee share plan?
No, unless the terms of the applicable collective agreement require such consultation.
Provision of insurance
What is the health insurance provision framework in your jurisdiction? For example, is it provided by the government, through private insurers or through self-funded arrangements provided by employers?
A publicly funded national health care system, Medicare, provides universal healthcare coverage to residents, subject to narrow exceptions. It is funded jointly by the federal and provincial governments and is regulated under the Canada Health Act, which requires coverage for all medically necessary care provided in hospitals or by physicians. However, because under the Canadian Constitution the provision of healthcare falls under provincial jurisdiction, there are differences in coverage under Medicare between the provinces.
Some provinces also charge annual healthcare premiums, such as Ontario through the employer health tax. Under this, subject to certain exemptions, employers are required to pay a defined amount to the government on an annual basis; the amount payable is defined as a percentage of the employer’s total Ontario remuneration payable.
Further, it is important to note that not all healthcare is provided through Medicare. Services such as dental and prescription coverage are not generally covered for all age groups. Most employers therefore offer additional coverage to their employees through private insurers. The cost of such insurance is often shared between employees and the employer.
Do any special laws mandate minimum coverage levels that must be provided by employers?
No, there are no laws which mandate minimum coverage levels that must be provided by employers.
Can employers provide different levels of health benefit coverage to different employees within the organisation?
Yes, employers can provide different levels of health benefit coverage to different employees within an organisation provided that the reason for differentiation is not based on discriminatory grounds in violation of human rights legislation (eg, gender, sexual orientation or race).
Are employers obliged to continue providing health insurance coverage after an employee’s termination of employment?
Yes, in many provinces employment standards legislation requires that an employer continue health insurance coverage during an employee’s statutory notice period.
An employer may also be required to continue benefit coverage during a common law notice period.