Federal Budget 2015 At A Glance
The April 21, 2015, federal budget (Budget) has measures of interest to employers and to pension and benefit plan sponsors and administrators. The increase in the TFSA limit to $10,000 and changes to the RRIF withdrawal factors provide greater opportunity for employees to save for retirement. Employers should also note changes to Employment Insurance premiums and benefits and, if their employees are federally regulated, expansion of protected leaves under the Canada Labour Code.
TFSA Contribution Limit
The annual limit for contributions to a tax-free savings account (TFSA) will increase from $5,500 to $10,000 for 2015 and future years, but will no longer be indexed to inflation. Because TFSA withdrawals are tax-free, for seniors subject to retirement benefit clawbacks (of the Guaranteed Income Supplement for low-income seniors or of the Old Age Security benefit for those with higher incomes), the TFSA could be a tax-effective vehicle for maximizing retirement income.
With the increase in life expectancy, TFSAs can be used to both extend eligibility for government-provided benefits and to maximize retirement income later in life, with any residual assets eligible for tax-free transfer to a spouse or children upon death. Some employers sponsor group TFSAs in addition to their primary capital accumulation plan and TFSAs may now become more popular.
RRIF Minimum Withdrawal Factors
Individuals who have retirement savings in a Registered Retirement Income Fund (RRIF) will be able to keep more of those savings in their RRIF. A RRIF is established when an individual transfers funds from a pension plan or RRSP. RRIFs are the primary means for delivering retirement income from assets accumulated in defined contribution pension plans.
Beginning in 2015, the minimum RRIF withdrawal requirements will be reduced for individuals aged 71 to 94 (the minimum withdrawal requirement before age 71 will remain the same). The federal government expects these changes will preserve RRIF capital with, for example, 20 per cent more RRIF capital at age 80 and 60 per cent more at age 95.
The new factors are based on updated assumptions for the annual nominal rate of return on RRIF assets (reduced from seven per cent to five per cent) and indexation (increased from one per cent to two per cent), which are more in line with long-term historical real rates of return and expected inflation.
Federal Pension Fund Investment Rules
In a measure aimed primarily at the large public sector pension funds, the federal government will consult on whether to keep the 30 per cent rule under the federal investment rules contained in Schedule III of the Regulations under the Pension Benefits Standards Act, 1985 (PBSA). Currently, pension funds cannot hold more than 30 per cent of a company’s voting shares. British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, and Newfoundland and Labrador have adopted this rule by reference, so a change in the federal rule would affect plans in these provinces.
Target Benefit Pension Plans
In April 2014, Finance Canada released a consultation paper proposing to permit target benefit plans (TBP) to be established by federally-regulated employers to convert existing defined benefit and defined contribution plans to a TBP.
The government will continue to assess TBPs and reiterates that members and retirees would have to consent before accrued DB benefits could be converted under a TBP.
Changes in income tax rules to accommodate TBPs will also be considered. Such amendments are needed to ensure that TBP participants are treated equitably, particularly with respect to the pension adjustment rules, and would be appropriate, given that other provinces have or are beginning to consider TBPs under their pension legislation.
Pooled Registered Pension Plans (PRPPs)
The budget notes the continued development of PRPPs, particularly the fact that Quebec’s voluntary retirement savings plan legislation is in force and that other provinces have passed PRPP legislation and are working on regulations. The federal government is also leading an initiative with the provinces to harmonize the administration of PRPPs across Canada which could help simplify administration.
The federal government will continue to fund public infrastructure projects, including providing PPP Canada Inc. with new funding of $750 million over two years starting in 2017-18, and $1 billion per year thereafter for a new public transit fund.
Debt Management Strategy
The government intends to change the mix of debt to achieve an even distribution of outstanding issuance across maturity sectors and states that it may issue more 50-year bonds in 2015/2016. This will interest institutional investors, such as pension plans, with long dated liabilities.
Projections for outstanding issuance in 2023/2024 indicate issuance of further 30-year debt, 30-year real return bonds, and a modest level of outstanding 50-year debt.
Providing Charities With More Flexibility To Diversify Their Investments
Canadian charities, especially foundations, often invest a portion of their resources in long-term investments. Effective in 2015, charities can invest in limited partnerships, allowing charities to diversify their investment portfolios away from equities and bonds.
Employment Insurance Premiums
EI premiums are expected to decrease from $1.88 per $100 in insurable earnings in 2016 to $1.49 in 2017. The government will implement the seven-year break-even EI premium rate-setting mechanism that sets EI premiums at a level no higher than needed to pay for EI benefits over time. Any surplus will be used to lower future premiums.
Extending Compassionate Care Benefits
As of January 1, 2016, compassionate care benefits under the Employment Insurance Act will be extended from the current six weeks to six months. Federal and provincial employment standards legislation currently provides for much shorter periods of job protected ‘compassionate care’ leave (generally eight weeks). In the past, federal and provincial employment standards legislation has been amended to accommodate the period in which an employee is entitled to an EI benefit.
Leaves Of Absence
Bereavement leave will be increased and new unpaid short-term and long-term leaves for family responsibilities will be protected under the Canada Labour Code with respect to federally-regulated employees. Amendments will also address violence and sexual harassment in the workplace.
Modernizing The Corporate Governance Framework
Proposed amendments to the Canada Business Corporations Act will promote gender diversity among public companies using the ‘comply or explain’ model of disclosure currently required for TSX-listed companies and by all provincial securities regulators other than Alberta and British Columbia. Amendments will also be proposed to modernize director election processes and communications with shareholders. Similar amendments will be proposed to related statutes governing co-operatives and not-for-profit corporations to ensure that federal laws are in alignment.
Simon Laxon (LL.B.) is a senior consultant at Towers Watson.