Federal Bill C-59 reforms Retirement Compensation Arrangements

Special Notice – July 29, 2024

On June 20, 2024, Bill C-59, the Fall Economic Statement Implementation Act, 2023, received Royal Assent. This Bill includes measures announced in the 2023 Federal Economic Budget, including reforms to Retirement Compensation Arrangements (RCAs).

Under the Income Tax Act (ITA), non-registered supplemental retirement plans (SRP) that are funded or secured arrangements are typically treated as an RCA. Contributions and investment income earned on assets in the RCA are subject to a 50% refundable tax. Tax remittances are held in a refundable tax account (RTA) with Canada Revenue Agency (CRA) and earn no investment income. The remittances in the RTA are gradually refunded as SRP benefits are paid to members from the RCA fund.

Prior to this change, fees or premiums paid for a letter of credit or a surety bond were subject to this refundable tax. This meant that the plan sponsor of a SRP that used letters of credit or surety bonds to secure the benefits of the SRP needed to submit an amount equal to the fees or premiums paid for the letters of credit or surety bonds to CRA, thereby doubling the cost of the security.  Further, since benefits due under a SRP not backed by assets are typically paid directly by the sponsor, they were effectively unrecoverable while the plan was ongoing.

The reform exempts fees and premiums paid to obtain or renew a letter of credit or surety bond for securing a SRP in an RCA. It also allows employers to request a refund of the refundable tax previously remitted for these now-exempt fees. The exemption is retroactively effective from March 28, 2023, and eligibility for a refund of previously remitted fees begins with the 2024 taxation year. The refund for a taxation year will be limited to 50% of all retirement benefits paid directly in that year up to the amount of the refundable tax previously paid. Depending on the amount in the RTA with CRA and the level of SRP benefits paid annually by the plan sponsor, it may take several years to recuperate the full amount previously submitted as a refundable tax.

This proposed change is certainly welcome news for employers who use these vehicles to secure their SRP. If sponsors have not already done so, they should immediately stop remitting any refundable tax for fees and premiums in respect of a letter of credit or surety bond. To request a refund, the ITA requires sponsors to make “an election with the Minister in a prescribed form and manner.” It is expected that this election form will be forthcoming and possibly included in future T3-RCA tax filing forms.

Should you have questions about this or other pension topics, please reach out to your Eckler consultant or connect with us at Eckler.ca.