Regulations Amending the Income Tax Regulations (COVID-19 – Relief for Deferred Salary Leave Plans and Pension Plans): SOR/2021-127
Canada Gazette, Part II, Volume 155, Number 13
SOR/2021-127 June 10, 2021
INCOME TAX ACT
P.C. 2021-522 June 10, 2021
His Excellency the Administrator of the Government of Canada in Council, on the recommendation of the Minister of Finance, pursuant to section 221 footnote a of the Income Tax Act footnote b, makes the annexed Regulations Amending the Income Tax Regulations (COVID-19 – Relief for Deferred Salary Leave Plans and Pension Plans).
Regulations Amending the Income Tax Regulations (COVID-19 – Relief for Deferred Salary Leave Plans and Pension Plans)
1 The Income Tax Regulations footnote 1 are amended by adding the following after section 6801:
COVID-19 — Deferred salary leave plan
6801.1 (1) For the purposes of paragraph 6801(a), if an employee's leave of absence is suspended on or after March 15, 2020 (referred to in this subsection as the “first period”) and the leave of absence resumes on or before April 30, 2022 (referred to in this subsection as the “second period”),
- (a) the employee's first period and second period are deemed to be one continuous leave of absence; and
- (b) amounts held for the employee's benefit under the arrangement shall be paid to the employee out of or under the arrangement no later than the end of the first taxation year that commences after the start of the second period.
(2) If the six-year period referred to in subparagraph 6801(a)(i) in respect of an arrangement would end during the period beginning on March 15, 2020 and ending on April 30, 2022, the reference in that subparagraph to “six years” is to be read as a reference to “eight years”.
2 (1) Section 8308 of the Regulations is amended by adding the following after subsection (4):
COVID-19 — Retroactive Benefits
(4.1) Paragraph (4)(c), in its application to a complete period of reduced services that ended in 2019, is to be read as follows:
- (c) the past service event occurs on or before June 1, 2020 or such later date as is acceptable to the Minister,
(2) Section 8308 of the Regulations is amended by adding the following after subsection (5):
COVID-19 — Retroactive Contributions
(5.1) Paragraph (5)(b), in its application to a complete period of reduced services that ended in 2019, is to be read as follows:
- (b) the retroactive contribution is made after 2019 and on or before June 1, 2020 or such later date as is acceptable to the Minister,
Conditions — Retroactive Contributions
(5.2) Subsection (5.3) applies in respect of a contribution made with respect to an individual under a money purchase provision of a registered pension plan (in this subsection and in subsection (5.3) referred to as a “retroactive contribution”), if
- (a) in the case of a contribution payable by an individual,
- (i) the individual makes the retroactive contribution after 2020 and on or before April 30, 2022, or
- (ii) the individual makes a written commitment, on or before April 30, 2022, to the plan administrator, or to a participating employer of the plan, to make the retroactive contribution;
- (b) in the case of a contribution payable by a participating employer,
- (i) the employer makes the retroactive contribution after 2020 and on or before April 30, 2022, or
- (ii) it is conditional on the individual making the retroactive contribution that the individual has committed to pay under subparagraph (a)(ii); and
- (c) the retroactive contribution replaces, in whole or in part, a contribution that would have been required to be made to the plan in the calendar year 2020 or 2021 but for an amendment made to the plan under sections 8511 and 8512 that reduced the contributions required to be made.
COVID-19 — Retroactive Contributions
(5.3) If this subsection applies in respect of a retroactive contribution,
- (a) each pension adjustment of the individual for the 2020 or 2021 calendar year with respect to an employer is deemed to be, and to always have been, the amount that it would have been had the retroactive contribution been made at the end of 2020 or 2021, as the case may be; and
- (b) the retroactive contribution is deemed, for the purpose of determining pension adjustments of the individual for any calendar year after the year referred to in paragraph (5.2)(c), to have been made at the end of that year and not to have been made at any subsequent time.
3 Section 8500 of the Regulations is amended by adding the following after subsection (1.2):
(1.3) For the purpose of determining under subsection 8507(3) whether a period in a calendar year is a qualifying period of an individual in the year with respect to an employer, the definition eligible period of reduced pay in subsection (1) is, in respect of the individual and the employer for the calendar year 2020 or 2021, modified as follows:
- (a) it is to be read without reference to its paragraph (a); and
- (b) its paragraph (c) is to be read as follows:
- (c) throughout which the remuneration received by the employee from the employer is less than the remuneration so received before the period; (période admissible de salaire réduit)
4 Section 8502 of the Regulations is amended by adding the following after paragraph (i):
COVID-19 — Borrowing
- (i.1) in their application to loans that are entered into after April 2020 and before February 2022, subparagraphs (i)(i) and (ii) are to be read as follows:
- (i) the loan or, if the loan is part of a series of loans or repayments, the series of loans and repayments is repaid no later than April 30, 2022, and
Coming into Force
5 These Regulations come into force on the day on which they are made.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
Administrators and participants of deferred salary leave plans and registered pension plans have experienced various challenges with respect to the administration of their plans during the COVID-19 pandemic. Amendments to the Income Tax Regulations (the Regulations) are required to provide increased flexibility to address the unique circumstances presented by the COVID-19 pandemic, such as employees postponing or being called back from their leaves of absence, or layoffs and wage rollbacks impacting registered pension plans.
Deferred salary leave plans
In order for an employer-sponsored plan to qualify as a deferred salary leave plan (DSLP) for tax purposes, it must meet several conditions outlined in section 6801 of the Regulations, including that (i) the leave of absence must generally be a continuous period of at least six months; and (ii) the deferral period cannot exceed six years.
During the COVID-19 pandemic, some employees wish to delay taking their leave of absence, or some employees on a leave of absence are being recalled to work (e.g. as essential service employees). Those decisions may result in some of the conditions applicable to DSLPs no longer being met, resulting in the termination of the plan and the immediate payment (and inclusion in taxable income) of all deferred salary to the participating employee.
Registered pension plans
Despite layoffs and wage rollbacks during the COVID-19 pandemic, many employers who sponsor registered pension plans wish to recognize pensionable service for such periods of reduced pay as if the periods were regular employment at normal rates of pay. Some employers need to suspend or reduce their contributions to their pension plan in 2020 or 2021 but have requested the flexibility to make catch-up contributions in 2021 or 2022. Finally, in light of liquidity challenges (including benefit payment challenges) for pension plans, some plan administrators requested temporary relief from restrictions on shorter-term borrowing.
The Regulations will be amended to add temporary stop-the-clock rules to the conditions applicable to DSLPs for the period between March 15, 2020, and April 30, 2022, in order to provide short-term relief to DSLP participants. These temporary changes will not require a DSLP to be terminated if an employee suspends a leave of absence to return to work or if an employee chooses to delay their paid leave of absence.
In order to provide short-term relief to registered pension plan administrators, the Regulations will be amended to modify the criteria for pensionable service and contributions during “eligible periods of reduced pay,” to permit catch-up contributions as late as April 30, 2022, in respect of 2020 or 2021 employment service, and to remove restrictions on short-term loans until April 30, 2022.
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. The deferred salary is taxable when received by the employee during the leave of absence. Various employers, including universities and the federal, provincial and territorial governments, offer these types of arrangements. In order to qualify as a DSLP, several conditions in paragraph 6801(a) of the Regulations must be met, including that (i) the leave of absence must generally be a continuous period of at least six months; and (ii) the deferral period cannot exceed six years.
Leave of absence period
During the COVID-19 pandemic, certain employees on a leave of absence are being recalled to work. If the employees had not been on leave for at least six consecutive months prior to being recalled to work, the plan would no longer qualify as a DSLP under the Regulations. Returning to work would require an immediate taxable lump sum payment of the deferred salary.
New subsection 6801.1(1) of the Regulations will ensure that if an employee on a leave of absence returns to work on or after March 15, 2020, and subsequently resumes their leave of absence on or before April 30, 2022, the two leave periods will be considered to be one consecutive leave of absence. If the leave of absence resumes in 2020, the deferred salary must be fully paid by the end of 2021. If the leave of absence resumes in 2021 or 2022 (but no later than April 30, 2022), the deferred salary must be fully paid by the end of 2022 or 2023, respectively.
Maximum six-year deferral limit
During the pandemic, certain employees are continuing to work and consequently will have to postpone their leave of absence period. Depending on the duration of their deferral period and if the leave of absence had been previously postponed, for some employees their DSLP would no longer comply with the maximum six-year deferral period.
New subsection 6801.1(2) of the Regulations will accommodate employees postponing their leave of absence by adding a temporary stop-the-clock rule. If an employee has not yet started a leave of absence, chooses to delay it, and if their deferral period would exceed six years sometime between March 15, 2020, and April 30, 2022, the deferral period will be extended to enable the employee to postpone their leave of absence by up to an additional two years.
These temporary rules allow for the two conditions described above to continue to be met (i.e. maximum six-year deferral period; minimum period of leave of absence) while employees are being recalled to work or postponing their leave of absences during the COVID-19 pandemic. As the conditions will be met, it will not be required for an employee's DSLP to be terminated, therefore alleviating any immediate tax consequences that would result.
Registered pension plans
Extended 2020 deadline
In cases where an individual has completed a period of reduced service in a particular year, special rules under subsections 8308(4) and (5) of the Regulations permit the employer to provide retroactive benefits or retroactive contributions for the member under a registered pension plan. The employer is required to report a pension adjustment on the employee's T4 slip by April 30 of the year following the year that is being credited on a retroactive basis. During the COVID-19 pandemic, employers requested additional time to provide retroactive benefits and to report to the Canada Revenue Agency.
For a period of reduced service that ended in 2019 and that is being credited in 2020 for pensionable purposes, the employer is required to report a pension adjustment for 2019 by April 30, 2020. New subsections 8308(4.1) and (5.1) of the Regulations extend the deadline to “June 1, 2020 or such later date as is acceptable to the Minister.” This amendment generally corresponds to the Canada Revenue Agency's decision to extend the filing deadline that applies to individual income tax returns from April 30, 2020, to June 1, 2020.
In light of economic challenges during the COVID-19 pandemic, some employers who sponsor a defined contribution pension plan (referred to in the Regulations as a money purchase plan) have suspended or reduced their contributions to the plan in 2020 or 2021. Those employers may wish to make additional contributions in 2021 or 2022 (above their regular contribution rates) to fully or partially make up for the reduced contributions. In some cases where employers choose to make catch-up contributions plus the regular contributions in respect of a particular year, the total contributions would exceed the annual contribution limits set out in the Regulations.
New subsection 8308(5.2) of the Regulations will permit catch-up contributions to money purchase plans in 2021 and 2022, subject to three conditions. First, the contributions payable by the employee (if any) can be made by (i) making retroactive contributions after 2020 and before May 2022; or (ii) entering into a written commitment with the employer before May 2022. Second, the contribution payable by the employer must be made (i) after 2020 and before May 2022; or (ii) in accordance with the employee's written commitment. Third, the amount of the retroactive contribution must replace, in whole or in part, a contribution that otherwise would have been required in 2020 or 2021, if an amendment to the registered pension plan to reduce the contributions had not been made.
New subsection 8308(5.3) of the Regulations sets out the rules that apply to a retroactive contribution made under the conditions in subsection 8308(5.2). For retroactive contributions made in 2021 or 2022, the employee's pension adjustment for the year is deemed to include the amount of the retroactive contribution as if it had been made at the end of the year.
In the case where an individual enters into a written commitment to make a retroactive contribution, the commitment is subject to rules described in paragraphs 8308(6)(d) to (g) of the Regulations. Those rules deem the future contributions to have been made in the year the individual enters into the commitment and to be included in the employee's pension adjustment in the prior years. For example, if an employee enters into a commitment on April 15, 2021, to make catch-up contributions in respect of 2020, by payroll deductions from May 2021 to December 2022, the projected amount of those additional contributions in 2021 and 2022 will be included in the employee's pension adjustment for 2020.
Two thirds of members of registered pension plans in Canada participate in defined contribution pension plans, sponsored primarily by small and medium-size companies who are particularly vulnerable to the economic disruptions caused by the COVID-19 pandemic. This temporary change in tax rules provides contribution flexibility in 2020 and 2021 for employers who sponsor a defined contribution pension.
Eligible period of reduced pay
An “eligible period of reduced pay” of an employee with respect to an employer is defined in subsection 8500(1) of the Regulations as a period of employment in respect of which certain conditions are met. Where an individual is on an eligible period of reduced pay, the Regulations permit money purchase contributions to continue to be made, and benefits under defined benefit provisions to continue to accrue, based on a notional amount of prescribed compensation during a period where the individual's rate of pay is less than usual due to reduced services. This enables a pension plan to recognize pensionable service for periods of reduced pay as if the periods were of regular employment at a normal rate of pay, without exceeding the pension adjustment limits in the Income Tax Act.
New subsection 8500(1.3) of the Regulations modifies the definition of “eligible period of reduced pay” in subsection 8500(1) for 2020 and 2021 in two ways. First, the modified definition excludes the requirement that the employee must have been employed by the employer for at least 36 months before the period. Second, the modified definition will not require that the reduction in salary be commensurate with a reduction in services. Accordingly, if an employer imposes wage rollbacks in 2020 or 2021 for any reason (e.g. even without a reduction in work hours), the wage rollback will qualify as an “eligible period of reduced pay” for which the employer can determine “prescribed compensation” for pension calculation purposes.
This temporary change in tax rules will support the effective administration of registered pension plans in the face of employment disruptions caused by the COVID-19 pandemic. That is, it permits employers to recognize pensionable service at pre-COVID-19 salary levels for employees experiencing salary reductions.
In general, to preserve pension contribution limits in the Income Tax Act, the Regulations prohibit a registered pension plan from borrowing money for the purposes of the plan, except in limited circumstances. Borrowing is permitted for the purpose of acquiring income-producing real property. It is otherwise permitted only if the loan has a maximum term of 90 days, if it is not part of a series of loans or repayments and if plan property is not pledged as security against the loan (unless the borrowing avoids a distress sale of plan assets).
In response to the liquidity challenges pension plans are facing during the COVID-19 pandemic, new paragraph 8502(i.1) of the Regulations extends the permitted duration of loans and suspends the restriction on a series of loans. A registered pension plan may thus enter into a loan or a series of loans after April 2020, but before February 2022, without the restriction of a 90-day term, provided that the loans are repaid no later than April 30, 2022.
During the COVID-19 pandemic and ensuing volatility in financial markets and pension assets, this temporary rule will assist defined benefit plans in managing liquidity challenges and capital commitments, and making benefit payments to retirees and their survivors.
Several stakeholders, including provincial and territorial governments, have expressed concerns with respect to the administration of DSLPs during the COVID-19 pandemic and have requested some flexibility in the Regulations that apply to DSLPs. These concerns focused primarily on the six consecutive months condition for the leave of absence period and the maximum six years of salary deferral.
Several employers who sponsor registered pension plans, or their legal or actuarial representatives, have requested temporary relief in the Regulations to provide flexibility in the effective administration of their pension plans during the COVID-19 pandemic.
A public announcement addressing the concerns raised by stakeholders, which included proposed amendments to the Income Tax Regulations, was made on July 2, 2020. Based on the ongoing pandemic and continued consultations with stakeholders, the government subsequently granted a one-year extension for the temporary relief measures (i.e. until April 30, 2022).
These amendments will allow for temporary relief and the cost impact is expected to be minimal.
The benefit to administrators and participants of deferred salary leave plans and registered pension plans is flexibility in the effective administration of these plans during the COVID-19 pandemic. Employees with DSLPs who are recalled to work would have the flexibility to continue their leave of absence at a later point in time and those who have not yet started their leave can choose to delay it further, without any immediate tax consequences.
The cost to the government is the delayed tax revenue (e.g. that would have been collected in the year due to the termination of a DSLP resulting in immediate payment of the deferred salary). Although this amount cannot be quantified, it is expected to be minimal, and ultimately the tax revenue will be collected in subsequent taxation years.
Small business lens
Analysis under the small business lens determined that these amendments will have a positive impact on up to 5 000 small businesses in Canada. These amendments are designed to respond to the difficult realities that all businesses, including small businesses, are faced with when responding to the pandemic. Small employers who sponsor a defined contribution pension plan can choose to take advantage of these temporary flexible amendments to the Regulations that will ease the administration of their pension plan.
The one-for-one rule does not apply to these amendments because they do not impose any administrative costs on businesses.
Regulatory cooperation and alignment
Due to the specificity of these measures, there were no requirements, and therefore no steps that were taken to coordinate or to align with other regulatory jurisdictions.
Strategic environmental assessment
In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a full strategic environmental assessment is not required.
Gender-based analysis plus
No gender-based analysis plus (GBA+) impacts have been identified for these amendments.
The Canada Revenue Agency will administer these temporary stop-the-clock rules to the conditions applicable to DSLPs for the period of March 15, 2020, to April 30, 2022.
The Canada Revenue Agency will administer the relief measures that apply to registered pension plans, specifically regarding periods of service in 2020 and 2021, catch-up contributions in 2021 and 2022, and lifting of restrictions for loans that are repaid no later than April 30, 2022.
Tax Legislation Division
Tax Policy Branch