On January 27, 2009, the Honourable Jim Flaherty, Minister of Finance, tabled the 2009 federal budget titled "Canada's Economic Action Plan". The nature and purpose of the Action Plan can be summarized by a statement in the Overview of the Action Plan: These are extraordinary times for the global economy and they call for extraordinary global measures.
The Action Plan contains a number of measures relating to pension plans and other retirement savings plans.
Solvency Funding Relief and Deemed Trust Concept. The budget reiterates the proposed temporary relief for federally regulated pension plans relating to payments in respect of 2008 solvency deficiencies. This proposal was introduced in the November 2008 Economic and Fiscal Statement. The Office of the Superintendent of Financial Institutions Canada (OSFI) recently provided additional information about the proposed funding relief in PBSA Update 30 (January 2009). The PBSA Update states that the preconditions for the relief will be set out in regulation and will be similar to the requirements set out in the 2006 Solvency Relief Regulation.
The budget also indicates that the Government will take action to assist OSFI to increase the current 110% limit on asset value smoothing by making the amount of any funding deferral resulting from the use of asset value in excess of 110% subject to a deemed trust. The expressed objective of this "deemed trust" concept is to improve pension plan member protection.
The action to be taken by the Government to introduce this "deemed trust" concept, its nature and its legal implications, particularly in the bankruptcy of the employer, remain to be seen. It is not clear what priority the proposed deemed trust may have, what property the deemed trust may apply to or whether its priority will be affected by bankruptcy or other insolvency proceedings. The Bankruptcy and Insolvency Act (Canada) (BIA) contains fairly clear rules about deemed trusts and pension priorities in bankruptcy but it is not clear how or whether the proposed new deemed trust would fit within that regime. Thus, the effectiveness of the "deemed trust" concept in protecting plan members (and, indirectly, in assisting OSFI to increase its limit on asset value smoothing) is not clear.
Consultation on Legislative and Regulatory Framework for Federally Regulated Pension Plans. On January 9, 2009, the Government released a consultation document relating to the legislative and regulatory framework for federally regulated pension plans. The timeline for consultation has been accelerated and consultation will be completed within 90 days, with a view to making permanent improvements before the end of 2009.
Canada Pension Plan (CPP). The budget reports that the federal, provincial and territorial ministers of finance expect to conclude their review of the CPP in 2009 and that the Government will work with the provinces and territories to implement changes recommended in this review.
Non-Resident Trusts (NRTs) and Foreign Investment Entities (FIEs). The budget indicates that the Government will review the outstanding proposals relating to NRTs and FIEs in light of submissions received by it (including recommendations made by the Advisory Panel on Canada's System of International Taxation), before proceeding with measures in this area. The NRT and FIE rules were first introduced in the 1999 Budget and most recently were included in Bill C-10, which was stalled in the Senate after extensive submissions were made raising concerns over the proposals, including concerns regarding the broad scope of the rules and their potential application to commercial trusts. The rules were of particular concern to pension plans. Under the rules as proposed, direct and indirect investments by a registered pension plan in a non-resident trust which did not meet the requirements for tax-exempt status (notwithstanding its commercial nature) could in some circumstances have resulted in a tax liability for the pension plan. The Advisory Panel recommended that the Government review and undertake consultation on the proposed NRT and FIE rules.
RRSP/RRIF Losses After Death. Currently, on the death of an annuitant, the fair market value of investments in an RRSP is generally included in the deceased's income in the year of death. When the RRSP is distributed to the beneficiaries, any increase in value since the date of the annuitant's death is included in the income of the beneficiaries. Where an RRSP decreases in value between the date of the annuitant's death and the date the investments are distributed to beneficiaries, the loss in value cannot be deducted, potentially leading to a harsh result. Similar rules apply to RRIFs.
The budget proposes to permit, upon the final distribution of property from a deceased annuitant's RRSP or RRIF, the amount of post-death decreases in the value of the RRSP or RRIF to be carried back and deducted against the RRSP/RRIF income inclusion for the year of the annuitant's death. The amount available for carry-back will generally be calculated as the difference between the amount included in the annuitant's income in respect of the RRSP or RRIF as a result of the annuitant's death and the total of all amounts paid out of the RRSP or RRIF after the death of the annuitant. This proposal will apply where the final distribution from the RRSP or RRIF occurs after 2008.
RRIF Minimum Withdrawals. The Notice of Ways and Means Motion tabled by the Government on November 28, 2008 included a proposal to reduce by 25% the 2008 minimum withdrawal amounts in respect of RRIFs and variable benefit money purchase registered pension plans and to allow for a recontribution where more than the reduced minimum amount has been received. The budget confirms the Government's intention to proceed with this proposal.