A Conversation With a Canadian Benefits Attorney

Transcription

1 A Conversation With a Canadian Benefits Attorney 28 th Annual National CLE Conference Employee Benefits January 5, 2011 (5:30 6:30 p.m.) Elizabeth M. Brown Hicks Morley Hamilton Stewart Storie LLP

2 Overview I. How The Canadian Retirement System Works II. III. IV. Defined Benefit and Defined Contribution Plans Canadian Pension Law Reforms Non-Pension Benefits V. Executive Compensation 2

3 I. How The Canadian Retirement System Works Three Pillars: Old Age Security Program (OAS) Canadian Pension Plan (CPP) Individual/Employer Tax Assisted Retirement Savings RPPs (Defined Benefit and Defined Contribution [Money Purchase] Pension Plan) RRSPs, DPSPs, EPSPs IPPs TFSAs 3

4 I. How The Canadian Retirement System Works Old Age Security ( OAS ) provides a flat rate retirement benefit based on years of residency in Canada commences at age 65 Canada Pension Plan ( CPP ) provides a career average earnings DB plan including retirement, disability, surviving spouse and child s pensions commences between age 60 and 70 4

5 I. How The Canadian Retirement System Works Canada Pension Plan (CPP) Covers virtually all employed and self-employed workers in Canada (age 18 to 70) who earn more than a prescribed minimum amount ($3500) each year Contributions apply to the year s maximum pensionable earnings ($47,200 for 2010) CPP contribution rate set each year (4.95 % in 2010) Maximum CPP payment in 2010 is $11,210 5

6 I. How The Canadian Retirement System Works Canada Pension Plan (CPP) Employers must deduct employee CPP contributions from pay and remit these amounts Employers make matching contributions. CPP contributions are tax deductible for both employers and employees 6

7 I. How The Canadian Retirement System Works Canada Pension Plan Investment Board first investments in 1999 manages pensions for 17 million contributors and beneficiaries purpose to invest CPP assets with minimum of risk professional investment management operating in private sector with public sector accountability independent board of directors operates arm s length from governments fund valued at $138 billion claims to be stable 7

8 I. How The Canadian Retirement System Works Tax Assisted Retirement Savings Tax assistance for retirement savings allows eligible contributions to pension plans (value of pension accrual) to be deducted from income Return on savings in plans is not taxed each year, and tax is paid when income is received from the plans The RPP/RRSP contribution limits are fully integrated contributions to RPPs and RRSPs are subject to annual personal limits the 2010 limit for all Canadians is $22,450 or 18% of prior year s earned income 8

9 I. How The Canadian Retirement System Works Registered Pension Plans Employee contributions to pension plans are deductible Employer contributions to pension plans are deductible to the employer and not subject to tax in the hands of employees Value of pension accrued each year (Pension Adjustment or PA ) reduces overall RRSP contribution room Income earned on pension assets not subject to tax while invested in pension vehicle Pensions paid are subject to tax Pension income splitting between spouses allowed 9

10 I. How The Canadian Retirement System Works Retirement Income of $50,000 CPP % OAS % Retirement Savings - 65% 10

11 I. How The Canadian Retirement System Works Registered Pension Plans Defined Benefit Maximum pension rule prohibits a pension plan from paying any DB pension benefit greater than: 2% of the average of the employee s best three consecutive years of earnings, multiplied by their number of years of service; or $87,305 in 2010 for a 35 year employee 11

12 I. How The Canadian Retirement System Works Registered Pension Plans Defined Contribution Maximum annual contributions (employee and employer combined) set at 18% of compensation subject to maximum of $22,450 12

13 II. Defined Benefit and Defined Contribution Pension Plans minimum standards for pension plans based on jurisdiction of employment (could be provincial or federal) all provinces except Prince Edward Island (Bill introduced on December 2, 2010) much less of the law is codified than in the U.S. 13

14 II. Defined Benefit and Defined Contribution Pension Plans employer has role as sponsor and administrator plan administrators are subject to a general fiduciary duty, which is similar in each Canadian jurisdiction sponsor function is not fiduciary most public sector pension plans are DB shift to DC plans in private sector 14

15 II. Defined Benefit and Defined Contribution Pension Plans Investments fiduciary duty extends to the investment of pension assets most provinces follow the Federal Investment Rules, which have recently been changed Removal of Quantitative Limits on Resource and Real Property Investments 15

16 II. Defined Benefit and Defined Contribution Pension Plans Investments Future changes ahead: Real Estate and Canadian Resource Properties (will modify 10% limit) Related Party Transactions and Prohibited Investments (will eliminate exceptions to general rule) Other Rules: 30% Limit on Voting Rights Restrictions on Borrowing 16

17 II. Defined Benefit and Defined Contribution Pension Plans Litigation significant litigation involving defined benefit pension plans: surpluses deficits and insolvent employers proper plan expenses member disclosure/communication governance 17

18 II. Defined Benefit and Defined Contribution Pension Plans - Litigation very little defined contribution plan litigation...yet: few mature DC plans in Canada relatively little statutory guidance Capital Accumulation Plan guidelines Bill C-47 safe harbours 18

19 II. Defined Benefit and Defined Contribution Pension Plans Emerging Issues increase in age and disability based claims rectification claims based on failure of governance Director and Officer exposure 19

20 III. Canadian Pension Law Reforms most significant changes in a generation large-scale federal and provincial pension reforms Bills 236 and 120 (Ontario) affects most pension plans in Canada Bills C-9 and C-47 (Federal Pension Jurisdiction) affects pension plans sponsored by banks, airlines, broadcasting corporations 20

21 III. Canadian Pension Law Reforms immediate vesting, increased member disclosure, and regulatory oversight virtually all pension plans will have to be amended introduction of target benefit plans and phased retirement changes to funding of multi-employer pension plans and jointly-sponsored pension plans 21

22 III. Canadian Pension Law Reforms Mandatory Retirement Abolished abolished in most provinces before, an employer could force retirement at 65 still technically available for federally regulated employers recent decisions of the Canadian Human Rights Tribunal and Federal Court of Appeal found this to be a discriminatory practice, in a case involving Canadian airline pilots 22

23 IV. Non-Pension Benefits Provincial Health Care Employer Group Benefits (Health and Welfare) Post-Age 65 Benefits for Active Employees Retiree Benefits 23

24 IV. Non-Pension Benefits Provincial Health Care Provinces have universal government-sponsored health insurance programs which cover most hospital, medical and surgical procedures The health insurance programs in Ontario ( OHIP ), Quebec, Manitoba and Newfoundland partly funded by employer health tax Payment of EHT is independent of OHIP coverage. EHT in Ontario is 1.95% of an employer s total remuneration in the province over $400,000/year 24

25 IV. Non-Pension Benefits Employer Group Benefits (Health and Welfare) second payor behind Provincial health care key issues in litigation: largely administration based claims failing to enrol lack of waiver documentation 25

26 IV. Non-Pension Benefits Post Age 65 Benefits for Active Employees recent decision held that employers are permitted to reduce or eliminate employee benefits once an employees reaches age 65 while the arbitrator found that these provisions did discriminate on the basis of age, the reduction of benefits was a reasonable approach to deal with the effects of the elimination of mandatory retirement reliance upon statutory exemption was upheld 26

27 IV. Non-Pension Benefits Retiree Benefits no statutory vesting protection for retiree benefits right to change or terminate depends on whether benefits are vested 27

28 IV. Non-Pension Benefits Retiree Benefits Major Decisions on Vesting: Dayco B.C. Nurses Union Bennett numerous class actions were settled after certification 28

29 IV. Non-Pension Benefits Retiree Benefits Employee Life and Health Trusts (ELHT) new trust designed to provide designated employee benefits amendments to the Income Tax Act will permit these trusts amounts paid to employees and retirees from an ELHT to be deducted from the calculation of the trust s income, yet benefits would be generally tax-free in the hands of the employee if the trust s costs, including payment to employees, exceed its revenue for a particular year, the excess will be treated as a business loss for the trust 29

30 V. Executive Compensation different tax rules for cash based and equity based compensation 30

31 V. Executive Compensation Cash Based Incentives examples of cash based plans are bonus plans, phantom share plans, share appreciation right plans, deferred share unit plans payments are generally taxed in the year of receipt, subject to constructive receipt and salary deferral arrangement ( SDA ) rules 31

32 V. Executive Compensation Equity Based Incentives most common equity based plan is a stock option plan employee taxed on exercise, not at time of grant employment income or more favourable capital gains treatment if certain conditions are met 2010 budget: changes affecting capital gains treatment, withholding obligations, and existing public company deferral option 32

33 V. Executive Compensation Stock Options Share Price $10 Exercise Date) $5 Grant Date) Increase in FMV between Exercise Date and Sale Date Increase in FMV between Grant Date and Exercise Date Grant Date Exercise Date Sale Date Time 33

34 V. Executive Compensation Stock Options An employee who exercises a stock option and acquires shares is generally required to include in employment income in the same year a benefit equal to: the fair market value of the shares at the time the shares are acquired by the employee Minus: any amount paid or payable by the employee to the corporation for the shares, and any amount paid by the employee to acquire the right to acquire the shares 34

35 V. Executive Compensation Stock Options Exceptions: Income inclusion may qualify for capital gains treatment (50%) if certain criteria met Deferred benefit for Canadian-controlled private corporation stock options if certain criteria met Deferred benefit for up to $100,000 of public company stock options if certain criteria met 35

36 V. Executive Compensation Stock Options 2010 Federal Budget introduced changes for stock option taxation affecting: capital gains treatment for employees on stock option cash outs $100,000 annual deferral for certain options employer withholding requirements 36

37 V. Executive Compensation Restricted Stock Taxation in Canada is much different than in the U.S. Generally, taxable benefit arises upon transfer of key incidents of ownership under Canadian tax law: the right to receive dividends right to vote shares irrespective of risk of forfeiture not used in Canada very much! 37

38 V. Executive Compensation Supplemental Employee Retirement Plans (SERPs) top-up to registered pension plan benefit unfunded taxed upon receipt funded treated as retirement compensation arrangement and subject to 50% refundable tax system on all contributions and investment return secured by letter of credit treated as retirement compensation arrangement 38

39 V. Executive Compensation Say on Pay the introduction of say on pay in Canada is recent, and follows U.S. initiative annual say on pay votes are up to individual companies no Canadian corporate legislation requires them Canadian companies are starting to require these votes as a result of a shareholder proposal notable Canadian companies are adopting say on pay policies 39

40 V. Executive Compensation Say on Pay existing say on pay policies based on the Model Policy from the Canadian Coalition for Good Governance (CCGG) CCGG recommends annual votes and full disclosure of compensation how effective are these votes? 40

41 Questions? 41