The current trend of defined-contribution pension plans combined with an aging population and increased longevity could mean Canadians may face a shortage of income in retirement.jacoblund/istock
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Investment industry associations are focusing their pre-budget submissions to the federal government this year on tax fairness for defined-contribution (DC) pension plans as well as more robust support for small businesses, most of which have suffered greatly during the pandemic.
In pre-budget consultations, Finance Minister Chrystia Freeland said the government’s focus is on jobs, economic growth and making life more affordable for Canadians. While a set date hasn’t been announced, it’s expected the budget will be tabled at the end of March or early April.
The Portfolio Management Association of Canada’s (PMAC) is asking for tax parity for Canadians who are invested in their company’s DC pension plan.
“Tax legislation hasn’t kept pace with how employers are setting up retirement savings plans,” says Katie Walmsley, president of PMAC. “No employer today is setting up traditional defined-benefit plans. The majority set up defined contribution vehicles that use pooled funds or group [registered retirement savings plans].”
PMAC’s pre-budget submission highlights that these funds do not receive the same tax benefits as mutual funds and segregated funds unless they have a minimum of 150 unitholders, which would allow them to achieve mutual fund trust (MFT) status.
Currently, a pension plan is counted as one unitholder even if it has hundreds of investors.
When pooled funds merge with other pooled funds, taxes are triggered. As a result, Canadians who are invested in these funds could find themselves subject to higher tax rates versus those who are invested in mutual funds or seg funds.
PMAC’s recommendation is an amendment to regulation 4801 of the Income Tax Act to create a “look through” to the underlying investors of DC pensions where they are considered widely held funds and given the same tax treatment as those with MFT status.
DC pension plans could face income shortage
The Conference for Advanced Life Underwriting (CALU) has made several recommendations in its pre-budget submission, including improvements to Canada’s health care system and an enhancement of the country’s retirement system to meet current needs.
A concern is the rise of DC pension plans combined with an aging population and increased longevity, says Guy Legault, president and chief executive officer at CALU. That means that Canadians may face a shortage of income to support them during retirement.
One way to enhance retirement income is by extending variable payment life annuities (VPLAs) to DC pension plans and tax-free savings accounts (TFSAs), says Kevin Wark, tax consultant with CALU.
“It will be difficult for insurance companies to create the product if it’s limited to defined-benefit pension plans. Extending it to defined-contribution plans and possibly TFSAs would create a larger group of people,” says Mr. Wark, adding it’s about getting enough people to participate to create a viable product.
CALU is also repeating its call for a long-term health care strategy. It’s also asking for better access to pharmacare and a reduction in prescription drug costs through government-insurer partnerships.
The pandemic has accelerated this thinking, Mr. Legault says.
“There’s actually a possibility that the federal government could develop a new Canadian insurance policy framework for long-term care to help individuals who end up in care facilities and those who want to stay in their home longer,” he says.
Debt forgiveness and extending relief programs
Meanwhile, the Canadian Federation of Independent Business’s (CFIB) submission focuses on strengthening support for small businesses as the country emerges from the pandemic.
That includes debt forgiveness, help in mitigating the increasing cost of doing business, and the extension of pandemic relief programs.
Jasmin Guenette, vice president of national affairs at CFIB, says revenue remains low for small businesses and many had to take on debt during the pandemic.
“Only 35 per cent of small businesses are making normal sales at the moment,” he says. “And 67 per cent of small businesses have reported that they had to take on debt to cope with COVID-19. On average, it was $158,000 per business.”
One recommendation is for the government to increase the forgivable portion of the Canada Emergency Business Account to 50 per cent. The program’s loan forgiveness is currently set at 25 per cent for loans up to $40,000 and up to 33 per cent for loans up to $60,000.
Another recommendation is a rebate for small businesses as a result of the five-year increase in payroll taxes. This increase started in 2019 and is expected to increase again this year and in 2023. Mr. Guenette says the CFIB is asking for a freeze on the increase or a rebate equivalent to the increase.
When it comes to vaccine mandates, the CFIB would like to see a plan to phase them out at the federal level, citing those related to travel and border crossings.
Finally, Mr. Guenette says that the federal government can use the budget announcement to encourage Canadians directly to support small businesses.
“It’s a good opportunity to talk to Canadians and reassure them it’s now safe to go back to in-person activities to help those small businesses generate additional revenue,” he says.
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