Relief measures for Registered Pension Plans and Deferred Salary Leave Plans


Finance Minister Bill Morneau today announced the release of proposed amendments to the Income Tax Regulations (Regulations) that apply to registered pension plans and deferred salary leave plans. These temporary relieving measures would help the participating employers and employees of those plans in the face of challenges created by the COVID-19 pandemic.

Proposed changes

Deferred Salary Leave Plans

The deferred salary leave plan (DSLP) rules permit employees to defer part of their salary over a number of years in order to fund a paid leave of absence from their job. The deferred salary is taxable when received by the employee during the leave of absence. In order to qualify as a DSLP, several conditions must be met, including that:

  1. the deferral period cannot be longer than six years; and
  2. the leave of absence must generally be a continuous period of at least six months.

As part of the response to the COVID-19 pandemic, some employees have been recalled to work before having been on leave for six months. As well, some employees will not be able to begin their leave of absence as scheduled. Under existing tax rules, when an employee’s DSLP ceases to meet the relevant conditions, the plan must be terminated and all deferred salary must be paid to the employee and included in their income.

To address these circumstances, the government proposes to add temporary stop-the-clock rules to the conditions applicable to DSLPs. These temporary changes will not require a DSLP to be terminated if an employee suspends a leave of absence to return to work or if an employee chooses to delay their paid leave of absence:

  • If an employee on a leave of absence returns to work on or after March 15, 2020 and subsequently resumes their leave of absence before May 1, 2021, the two leave periods will be considered one consecutive leave of absence.
  • If the leave of absence resumes in 2020, the deferred salary must be fully paid by the end of 2021. If the leave of absence resumes in 2021 (but no later than April 30), the deferred salary must be fully paid by the end of 2022.
  • If an employee has not yet started a leave of absence and their deferral period would first exceed six years between March 15, 2020 and April 30, 2021, the deferral period will be extended to enable the employee to postpone when their leave of absence starts by up to an additional 14 months.

Relaxation of borrowing restrictions

A registered pension plan is prohibited from borrowing, except in limited circumstances. Long-term borrowing is restricted to borrowing to acquire income-producing real property. Otherwise, borrowing is limited to a maximum term of 90 days and it cannot be part of a series of loans or repayments. As well, plan property may not generally be pledged as security for a borrowing.

In response to the potential liquidity challenges faced by pension plans as a result of the COVID-19 pandemic, the Regulations are proposed to be amended to temporarily suspend the 90-day limit on borrowing and the prohibition on a borrowing being part of a series of loans or repayments. A registered pension plan would be permitted to enter into a loan or a series of loans after April 2020 as long as the loan or series is repaid no later than April 30, 2021. The rule that plan property may not generally be pledged as security for a borrowing would continue to apply. The conditions related to borrowing to acquire real property are not being amended.

Catch-up money purchase contributions in respect of 2020

It is proposed to amend the Regulations to permit a retroactive contribution to be made to an employee’s money purchase account, in respect of the year 2020, whether or not the employee had reduced employment service or reduced pay, subject to three conditions:

  • a retroactive contribution is made by the employee (or the employee makes a written commitment to make the contribution) after 2020 and before May 2021;
  • a contribution must be made by the employer after 2020 and before May 2021 (or, if later, it matches contributions that the employee committed to making); and
  • the contribution must replace, in whole or in part, a contribution that otherwise would have been required for the 2020 year.

If these conditions are met in respect of a retroactive contribution, the contribution would be added to the employee’s pension adjustment for 2020.

This change would effectively permit retroactive contributions to a money purchase account to replace contributions that were not made in 2020 and ensure that retroactive contributions plus regular contributions in 2021 do not exceed the maximum contribution limit (the pension adjustment limit) for 2021.

Pension coverage during periods of reduced pay

If an employee is a member of a registered pension plan and is on an “eligible period of reduced pay” (i.e., their pay is reduced in line with their reduced work), the tax rules permit the plan to recognize full pensionable service (within certain limits) for periods of reduced pay as if the periods were regular employment at unreduced pay.

In order to recognize periods of reduced work and pay during the COVID-19 pandemic, the Regulations would be amended to modify the definition “eligible period of reduced pay” in two ways for 2020. First, the requirement that the employee must be employed for at least 36 months in order to qualify would be removed. That is, for 2020, an employer would be able to provide unreduced pension coverage to all employees, including newer employees.

Second, the requirement that the reduction in pay must be generally commensurate with the reduction in work hours would be removed. For example, if an employee works full-time for a period in 2020 during which wages are reduced by 20%, the proposed relief would permit the employer to provide pension coverage based on 100% of the wages that existed before the reduction.

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