Registered and Deferred Plans in Canada
The below excerpt is from the recently-released book, Registered and Deferred Plans in Canada. This book is a hands-on reference with helpful tips, real-life examples, and guidance on a variety of saving plans available to Canadians. If you wish to order this book, please visit http://www.cch.ca/product.aspx?WebID=5472 or call customer service at 1-800-268-4522.
Registered Supplementary Unemployment Benefit Plans
A supplementary unemployment benefit plan is a plan established by an employer or group of employers to top up employees’ employment insurance (“EI”) benefits during a period of unemployment because of training, sickness, accident or disability, maternal or parental leave, or a temporary stoppage of work (i.e., temporary lay-off).
Certain payments to a trustee in trust by an employer are deductible in computing business income. See ¶2320.
Any amount an employer receives from a trustee under a registered supplementary unemployment benefit plan to which the employer has made payments, resulting from an amendment, modification, or termination of the plan, is to be included in the employer’s income.
The trust itself is not taxable on its income as the employee or former employee who receives the periodic payments is taxable on such amounts when received by the employee or former employee.
Those wishing to establish such a plan should review Information Circular IC 72-5R2. As is recommended for new pension and deferred profit sharing plans, professional advice should be obtained before attempting to establish this type of plan.
A registered supplementary benefit plan is a plan that has been accepted by the Minister for registration in respect of the plan’s operations and constitution. Applications for registration should be made by letter directed to the Registered Plans Directorate of the CRA.
The minimum requirements for registration are that:
(1) the employer’s contributions must be made to a trust with a fiscal period ending on December 31;
(2) the plan must not be a superannuation or pension plan or an EPSP;
(3) the funds of the trust must be used exclusively for the benefit of employees or former employees who are laid off for an indefinite period for reasons other than sickness or accident and who are not retired;
(4) most employees should be those covered by unemployment insurance (e.g., a plan covering only executives and senior personnel will not be acceptable); and
(5) the amounts and timing of employer contributions should be laid down in the plan and the amounts should be reasonable.
Tax Advantages of Registration
Only registered supplementary unemployment benefit plans can derive the following tax advantages:
(1) the trust governed by a registered plan is not taxable on its income;
(2) the employer may deduct payments made to the trustee during a taxation year or within 30 days thereafter, to the extent not previously deducted;
(3) an employee or former employee is taxable on any amount received from the trustee during the year;
(4) an employer must include in income any amounts received in the year from the trustee of the plan as a result of an amendment or modification of the plan, or as a result of the termination or winding-up of the plan; and
(5) an amount paid by a taxpayer to a trustee of the plan is deductible.
Where an employer makes a payment to a trustee in trust under a supplementary employment benefit plan, exclusively for the payment of periodic amounts to employees or former employees who are or may be laid off for any temporary or indefinite period, such payments are deductible in computing business income if they were made in the year or within 30 days after the end of the year providing the plan has been registered with the Minister of National Revenue.
Any amount received by an employee from a trustee under a registered supplementary unemployment benefit plan (sometimes referred to as a guaranteed annual wage plan), must be included in income.
Any amount received by an employer on the amendment or wind-up of a supplementary employment benefit plan must be included in the income of the employer in the year received.