Supplemental Pension Plans Secured with a Letter of Credit may Soon Receive Much Anticipated Refundable Tax Relief

January 04, 2024

Written By Jordan Fremont, Ben Sissons and Hennadiy Kutsenko

On November 30, 2023, the federal government introduced Bill C-59, Fall Economic Statement Implementation Act, 2023 (Bill C-59), which included proposed amendments to the Income Tax Act (Canada) (ITA) to implement changes respecting the treatment of retirement compensation arrangements (RCAs) that had previously been announced as part of the 2023 Federal Budget.

The Problem

As we previously discussed in our blog, Supplemental Pension Plans Secured with a Letter of Credit—Federal Budget 2023 Proposes Refundable Tax Relief, RCAs can be a useful vehicle for employers to deliver funded or secured supplemental pension benefits to employees. However, unique issues related to RCA refundable tax arise where benefits are secured with a letter of credit or surety bond that is held by a third party (a RCA custodian). Specifically, RCA refundable tax is required to be remitted to the Canada Revenue Agency (CRA) in respect of initial and ongoing letter of credit or surety bond premiums or fees, which is then retained by CRA until such time as supplemental pension benefits are paid out by the RCA custodian.  However, as the letter of credit or surety bond is often held solely as security for payment of such benefits, it is therefore rare (outside of the sponsoring employer's insolvency) for supplemental pension benefits to become payable by the RCA custodian. Rather, in the normal course, those benefits are paid directly by the employer, with the result being that there is generally no practical means by which to recover the RCA refundable tax prior to the arrangement being fully wound-up.

The Proposed Solution

Bill C-59, if adopted as currently proposed, would exempt any premiums or fees paid on or after March 28, 2023, for the purposes of securing or renewing a letter of credit or surety bond for an RCA that is supplemental to a Specified Arrangement (as defined below) from being subject to the RCA refundable tax (Excluded Contributions). While in its initial announcement, the federal government only contemplated applying this exemption to RCAs that supplement registered pension plans (RPPs), Bill C-59 proposes to expand the scope of this measure to apply to any arrangement which:

• provides benefits which are supplemental to the benefits provided under a registered retirement savings plan, a deferred profit sharing plan, a pooled registered pension plan, an RPP, or any combination of these plans; or 
• substantially complies with the criteria to be a RPP (except for, most notably, the maximum benefit limits prescribed by the Income Tax Regulations (Canada) (a “Specified Arrangement”).

The Bill C-59 amendments would also introduce a refund mechanism for all Excluded Contributions made to a Specified Arrangement prior to March 28, 2023. Refunds under this provision would generally be issued at a rate of 50 percent of the retirement benefits paid directly by an eligible employer after 2023. Provided that the eligible employer makes an election and meets the necessary criteria, the employer (or RCA custodian, as the case may be) will be eligible to obtain a refund of up to 50 percent of all retirement benefits paid in the year to the benefit of RCA beneficiaries whose benefits were secured under a Specified Arrangement through a letter of credit or surety bond. This refund is limited to the amount obtained by A—B (the Specified Refundable Tax), where:

• "A" is the total amount of RCA refundable tax paid with respect to fees incurred prior to March 28, 2023 (which will remain static from year to year); and
• "B" is the total amount of all refunds payable for each preceding year (which will increase each year as refunds are paid).

Specified Refundable Tax refunds paid to an employer are to be included in the employer's taxable income for the taxation year in which such amounts are received.

Key Takeaways

The ITA amendments set out in Bill C-59 will, if adopted as proposed, provide significant tax relief to employers who currently sponsor RCAs that are Specified Arrangements under which benefits are secured by a letter of credit or surety bond, and would thus be a welcome change. Additionally, employers wishing to provide enhanced protections in respect of Specified Arrangements that are not presently funded or secured might view the ability to provide security through a letter of credit or surety bond (without needing to remit RCA refundable tax) as a more attractive option. 

We will continue to monitor the status of Bill C-59 and will provide updates as they become available. In the meantime, members of the Bennett Jones Pension and Benefits and Tax groups would be pleased to discuss any questions respecting Bill C-59’s RCA refundable tax related proposals or any other questions you may have.

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