Relief measures for Registered Pension Plans and deferred salary leave plans


On May 20, 2021, the Deputy Prime Minister and Minister of Finance announced the extension of proposed amendments to the Income Tax Regulations initially released on July 2, 2020 that apply to Registered Pension Plans (RPPs) and deferred salary leave plans (DSLPs). These temporary relieving measures would continue to provide relief to participating Canadian workers and their employers through the COVID-19 pandemic.

Proposed changes

Deferred Salary Leave Plans

The 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. Deferred salary received during the leave of absence is taxable. In order to qualify as a DSLP, several conditions must be met, including:

(i)  the deferral period cannot be longer than six years; and

(ii)  the leave of absence must generally be a continuous period of at least six months.

During the pandemic, some workers have been recalled to work before having been on leave for the minimum required period of six months. Others have been unable to begin their scheduled leave of absence.

Under existing tax rules, when an employee’s DSLP ceases to meet conditions, the plan must be terminated and all deferred salary must be paid to the employee and reported as income for tax purposes. To make sure workers are not penalized due to circumstances beyond their control, the government is proposing to extend the temporary “stop-the-clock” rules to DSLP conditions. These temporary changes will mean that if a worker suspends a leave of absence to return to work or chooses to delay their paid leave of absence, their DSLP does not need to be terminated. The applicable outcomes of this amendment are:

  • 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, 2022, the two leave periods will be considered one consecutive leave of absence.
  • If an employee resumes their leave of absence in 2021, the deferred salary must be fully paid by the end of 2022. If an employee resumes their leave of absence in 2022 (but no later than April 30), the deferred salary must be fully paid by the end of 2023.
  • If an employee has not yet started a leave of absence and their deferral period would exceed six years between March 15, 2020 and April 30, 2022, the deferral period will be extended so the employee can postpone the start of their leave of absence by up to 26 months.

Relaxation of pension plan borrowing restrictions

In response to the potential liquidity challenges faced by RPPs as a result of the COVID-19 pandemic, the regulations are proposed to be amended to continue to temporarily suspend the 90-day limit on borrowing and suspend the prohibition on borrowing being part of a series of loans or repayments. RPPs would continue to be permitted to enter into loans after April 2020 as long as loans are repaid no later than April 30, 2022. Plan property would still not be able to be pledged as security for a borrowing. The conditions related to borrowing to acquire real property are not amended.

Catch-up money purchase contributions for 2020 pension plans

The proposed amendments would continue to permit retroactive contributions to an employee’s money purchase account for 2020 or 2021, 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 2022;
  • a contribution must be made by the employer after 2020 and before May 2022 (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 or 2021 year.

If these conditions are met, the retroactive contribution would be added to the employee’s pension adjustment for the year in which the contribution would otherwise have been made, under the terms of their plan.

This change would permit retroactive contributions to a money purchase account to replace contributions not made in 2020 or 2021, and ensure that retroactive contributions plus regular contributions in 2021 or 2022 do not exceed the maximum contribution limit (the pension adjustment limit) for 2021 or 2022.

Pension coverage during periods of reduced pay

If an employee is a member of an RPP 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 proposed amendments would continue to temporarily modify the definition of “eligible period of reduced pay” in two ways for 2020 and 2021:

  • First, the requirement that the employee be employed for at least 36 months to qualify would be removed. That is, for 2020 and 2021, an employer is able to provide unreduced pension coverage to all employees, including newer employees; and
  • Second, the requirement that the reduction in pay be generally commensurate with the reduction in work hours would be removed. For example, if an employee works full-time for a period in 2021 but wages are reduced by 20 per cent, the proposed relief would permit the employer to provide pension coverage based on 100 per cent of the wages before the reduction.

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