Based on changes to the Income Tax Act and Regulations, the Canada Revenue Agency (CRA) has recently published commentary on the handling of over- and under-contributions to Defined Contribution Pension Plans (DCPP).
The updated sections of the Income Tax Act and Regulations (ITA) allow DC plan administrators to correct contribution errors from the immediately preceding 10 years (within a set limit) to prevent plan revocation.
Contribution corrections must be current dated, and can’t be backdated, up to a limit allowed in ITA.
- Correcting Permitted Corrective Over-Contributions:
- The Pension Adjustment Correction (PAC) includes returned contributions from the immediately preceding 10 years, up to a limit allowed by ITA.
- Pension Adjustment Correction (PAC) amount must be reported on a T10, Pension Adjustment Reversal (PAR) or Pension Adjustment Correction (PAC) slip. Reporting deadlines depend on the timing of over-contributions.
- Refunds for over-contributions must be issued to members and/or employer and reported as income unless the exception under ITA clause applies. The T4A slip will be issued regardless, and special withholding tax rates will apply.
- Rectifying over-contributions reduces RRSP contribution room, potentially limiting future deductible RSP contributions.
- Correcting Under-Contributions
- The plan must have had at least 10 members throughout the year or not more than 50% of the contributions made to the DC plan were on behalf of a specified individuals as noted in ITA.
- Permitted Corrective Contributions must be correct based on the formula outlined by CRA.
- Reasonable rate of interests may to be added to a return of contributions as to compensate for missed interests.
- Prescribed information return T215 must be filed with CRA. Reporting deadlines depend on the timing of over-contributions.
- Rectifying under-contributions will result in reducing the RRSP contribution room in the next tax year after the contribution is made. If the correction result in negative RSP contribution room, the individual is prohibited from making new deductible RSP contributions (and may be subject to Part.1. tax on un-deducted RSP contributions) until the individual earns future RSP contribution room and eliminates the negative balance.
What is the impact of these changes?
Effectively, these amendments grant DC pension plan administrators the flexibility to correct contribution errors from the immediately preceding 10 years, ensuring compliance with tax regulations and averting plan revocation.
When will these changes take effect?
- Bill C-47, enacted on June 22, 2023, formalized these changes into law.
- These amendments take effect as of January 1, 2021.
If you determine a contribution error has occurred, we recommend that you seek advice from your legal and/or tax advisor on how it should be addressed.
If you have any questions, please contact your Sun Life Group Retirement Services representative.