New tax rules ease contribution error correction process

Federal Bill C-47 or the Budget Implementation Act was passed and received Royal Assent last June 22. Included in the bill are the long-awaited amendments regarding pensions, specifically the process of correcting contribution errors in Defined Contribution (DC) pension plans under the Income Tax Act, as reported in an article by Fasken. 

What are DC Pension Plans? 

DC pension plans involve the number of contributions that are required to a pension plan, as defined by the Financial Services Regulatory Authority of Ontario. It allows members to better understand the terms of their plans, investments choices, and retirement income options as they may not know the exact amount that they will save by the time of their retirement. 

What are the problems with the Income Tax Act regarding DC pension plans? 

Sometimes, there are under-contribution errors in DC plans, Fasken noted in their article.  

An example is when an employee’s enrollment or contribution to a pension plan was made on their behalf while they were in a leave of absence. The previous rules made it so that if there was a mistake in employer and employee contributions, it was not possible to go back to correct it in the previous years.  

Instead, the contributions and investment returns to correct the records from the past were added in contributions for service in the current year. Since there was an annual pension contribution limit under the Income Tax Act, many employers and members had to impractically spread their missed contributions over several years.  

Over-contribution errors also occurred when compensations are mistaken as pensionable earnings. Before, a plan administrator was only allowed to return contributions of employers and employees in limited circumstances. Refunding of investment earnings were also not permitted which meant that investment returns posed a problem. 

What were the changes enacted in the Federal Bill C-47 concerning pension contribution errors? 

In the new Tax Act, employers and members are now allowed to correct under-contributions through a tax deductible permitted corrective contribution (PCC). While most of the previous rules set in the bill will continue to operate alongside it, the PCC will not be subjected to the annual contribution limits of the Income Tax Act as it will have a separate limit.  

The changes also include the addition of a pension adjustment correction (PAC) which is applicable to over-contribution refunds from the plan where it is required in order to avoid the revocation of its registration. It will also restore or increase the employee’s RRSP deduction limit depending on how much it was previously reduced by their over-contributions.  

The distribution of reasonable investment returns regarding over-contribution will also be allowed. 

The superintendent of financial institutions, Peter Routledge, said in a statement that the changes enacted in the bill were to complement the Office of the Superintendent of Financial Institution’s (OSFI) purpose of contributing to the public’s confidence in the Canadian financial system. 

The nuances of PPC and PAC rules are expected to be more apparent as plan administrators put them into use.