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2019 Federal Budget Commentary

Posted under: IPP, News


The 2019 Federal Budget was released March 19th, 2019 and though it contained a few measures of note, there were far fewer changes that would impact tax planning than we have seen in the previous three years.

We saw the introduction of a new refundable tax credit to assist in skill and training upgrades for Canadians, an increase in the RRSP limit of the Home Buyers Plan for first time home buyers to $35,000, changes to the taxation of stock options for higher income individuals, and changes to registered annuities to allow for two new forms referred to as Advanced Life Deferred Annuities and Variable Payment Life Annuities. Otherwise, there were no tax cuts or increases of note.

The only impact to GBL is a change to prior pension plan transfers to an Individual Pension Plan (IPP).  A retiring employee of a large corporate or public defined benefit plan normally has options on how to take their pension.  They would often initiate a tax-free transfer of a portion of the pension to a locked in retirement account (LIRA).  No tax is paid on amounts inside the LIRA until the retiree decides to start drawing it down, however there is typically a taxable lump sum that isn’t eligible for tax-free transfer into the LIRA, which would be taxed as income in that year.

Prior to the Budget, if the terminating or retiring employee had an incorporated business, they could establish an IPP in order to transfer the entire commuted value of their pension to the IPP to circumvent the taxable lump sum associated with the LIRA transfer. The 2019 Budget eliminated the ability to transfer prior plan assets to an IPP.

This isn’t a ground-breaking change, as the Government did have rules in place prior to the Budget to deal with situations whereas an underlying business that set up an IPP had to follow certain rules for the transfer to be acceptable. The “Primary Purpose Test” has been in place to ensure that the business is legitimate and that it paid the member a reasonable T4 in order to legitimize the plan. If these rules were not followed, CRA would disallow the strategy and the retiree was left with a pension plan that was in limbo and possibly subject to a significant tax. The Budgetary changes eliminate any risk of these transactions being offside by eliminating the strategy altogether.

It is important to note that this change only impacted the viability of a very small number of potential IPPs and has no impact on the vast majority of existing or new IPPs.  It was commented in the budget that service accrued from T4 history with a company sponsor on either a past or going forward basis continues to be acceptable.  As such, we are confident that the Ministry of Finance isn’t making moves to significantly reduce the efficiency of the IPP, nor do they plan to eliminate it altogether.

Finally, there were no changes to the tax treatment on employer health benefits to Health Benefit Plans (HBPs) or any changes to Retirement Compensation Arrangements (RCAs).  GBL is expecting that all of the strategies mentioned will continue to grow in popularity throughout 2019.  Please contact us at 403.249.1820 or info@gblinc.ca with any inquires.