Special Issue March 26, 2009 revised April 13, 2009

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1 Special Issue March 26, 2009 revised April 13, 2009 Ontario 2009 Budget On March 26, 2009, the Ontario government released a budget that focuses on strategies to help Ontarians hurt by the global recession. Ontario is experiencing the impact of a sudden slowdown in the global economy due, in part, to the deterioration of the U.S. economy which is strongly interconnected with the province's economy. The Ministry of Finance projects a 2.5% decline in Ontario's real GDP in Growth is expected to resume during the second half of 2009 and strengthen over the next few years, with real GDP growth rates of 2.3% in 2010 and 3.3% in The budget lays out, among other things, actions to make Ontario more competitive, introduces a new combined single sales tax, continues the process of pension reform and addresses pension funding concerns. Stimulus Package - Preserving and Creating Jobs The government will invest $34 billion over the next two years to stimulate economic growth. Significant initiatives to preserve and create jobs include: providing $32.5 billion for infrastructure projects over the next two years, supporting an estimated 146,000 jobs in and 168,000 jobs in ; increasing spending on summer jobs by 57% to nearly $90 million in 2009, helping over 100,000 young people; providing nearly $700 million more over two years for a series of measures, including new or expanded skills training and literacy initiatives; providing nearly $130 million over three years in new support for the agriculture, mining and forest products sectors; and providing more than $300 million in and in new targeted business tax relief to foster innovation and the entertainment and creative sector. These initiatives aim to foster Ontario s future competitiveness by enhancing the province s infrastructure base, investing in the skills and knowledge of Ontario's workforce and supporting key sectors. Single Sales Tax Harmonization It is proposed that, starting July 1, 2010, Ontario would move to a single, value-added sales tax that would be federally administered. The single sales tax (SST) would combine the federal Goods and Services Tax (GST of 5%) and Retail Sales Tax (RST of 8%) for a harmonized rate of 13%. The application of the SST would be largely consistent with the GST. That is to say, goods and services that previously attracted only GST, may now attract SST. The SST would not be charged on a range of items, page 1

2 such as basic groceries, prescription drugs, and medical devises. The SST, like the GST, would be subject to an input tax credit on the SST paid for most goods and services purchased. A Harmonized Sales Tax (HST) has been in effect in Newfoundland, New Brunswick and Nova Scotia since April 1, The SST proposed in the budget will be similar to the HST. SST and Group Benefits Application of the GST and/or RST to group benefit programs depends on the nature of the funding arrangement in place. The following table summarizes the taxation of the Ontario group benefit programs, inclusive of the 2% premium tax. Under the SST, the current 8% RST would remain in effect on the same types of group insurance currently taxed under the RST. Ontario Group Benefit Plan Provincial and Federal Taxation Summary March 2009 Contract Type 2% Premium Tax 8% Provincial RST 5% Federal GST New SST Insured Applies Applies N/A N/A Self-Insured (ASO) w/o an attached insurance contract Applies Applies Applies Applies Self-Insured (ASO) with an attached insurance contract EAP Services N/A N/A + Applies Applies N/A N/A Applies * Will result in an 8% increase in taxes based on the inclusion of the Retail Sales Taxes. = Applies* The RST and GST already applies in Ontario to plans provided on a pure self-insured or Administrative Services Only (ASO) basis. One implication of the new SST is the application of the current 8% RST to other services available to group policyholders and plan members where, currently, only the GST is applied. The introduction of the SST will not have an impact on group benefit programs with the possible exception of an additional 8% tax payable on Employee and Family Assistance Programs. Pension Reform The budget sustains the pension reform momentum created with the appointment the Expert Commission in November 2006 and its report that was released in November Recognizing that pension funds constitute the second-largest source of investment capital in Canada, the government proposes the following steps to strengthen Ontario's pension system: Establish a Pension Reform Advisory Council to provide feedback on specific pension reform proposals with the goal to introduce legislation in the fall of Continue working with other jurisdictions, to review the tax and investment rules relating to pension plans and strategies to explore broader policy issues relating to retirement income adequacy and pension coverage. Aon Consulting Ready Special Issue March 26, 2009 revised April 13, 2009 page 2

3 Work to finalize a proposed multilateral agreement clarifying the administration and regulation of multi-jurisdictional pension plans. Commission an independent actuarial projection study of the Pension Benefits Guarantee Fund (PBGF), with a view to creating an independent, sustainable PBGF where the PBGF's liabilities would be limited to its assets. Move forward with changes related to pension division on marriage breakdown introduced in Bill 133 on November 24, 2008 (Regulations will be developed through consultation with stakeholders). Adopt legislation that would complement the federal tax changes in 2008 introducing phased retirement, which allow plan members to continue to earn pension benefits while drawing down part of their pension. Enhance the powers of the Superintendent of Financial Services with regard to reviewing pension arrangements in restructuring proceedings. Improve the service and effectiveness of pension regulation, with Financial Services Commission of Ontario (FSCO) assigning 25 additional full-time positions (over a three-year period). Consult with the Canadian Institute of Actuaries and FSCO representatives to review actuarial standards and practices to improve pension plan funding. Improve the collection of pension-related data and analytic and research capability to improve pension policy and regulation. Expand the mandate of the Ontario Teachers' Pension Plan (OTPP) to provide pension services to other pension plans and institutional investors in the public sector. While it may seem that the Ontario government has set forth an ambitious agenda for itself, the task at hand simply reflects the fact that the pension system has been long overdue for a major overhaul. There are no surprises in the budget proposals given the direction of the recommendations in its Expert Commission's Report, A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules. However, the devil will be in the details and it will be several months before it is clear how far the government will go to achieve its objectives. One observation during the consultation process was the entrenched and often divergent positions being taken by various stakeholders. As things move forward, success will be highly dependent upon key individuals bringing forth a strong vision and commitment to the process, to ensure that it results in effective legislative change. Solvency Funding Relief Measures As announced in December 2008, the government has confirmed its intention to introduce temporary solvency funding relief, which can be adopted for the first scheduled valuation report dated on or after September 30, Plan sponsors struggling with the heavy contribution burden resulting from the current economic crisis may elect from the following relief measures: consolidate existing solvency payment schedules into a new five-year payment schedule; defer for one year from the valuation date, the start of new going-concern and solvency special payments identified in the valuation report; and subject to not more than one-third of plan beneficiaries in aggregate objecting, extend the solvency payment schedule to a maximum of 10 years for a new solvency deficiency determined in the report (with the option to use up to 10 years of going-concern special payments to determine the net solvency deficiency). Aon Consulting Ready Special Issue March 26, 2009 revised April 13, 2009 page 3

4 If any of the preceding elections are made, solvency excess identified in subsequent valuation reports could be used to reduce or eliminate solvency special payments identified in the initial report. In addition, plan sponsors may adopt the Canadian Institute of Actuaries revised Standard of Practice for Pension Commuted Values, scheduled to take effect April 1, 2009, for solvency valuations as of December 12, Balancing the funding relief measures, are a number of proposals in the areas of disclosure and benefit security: Enhanced notice requirements to all plan members regarding the funded status of the plan and the effect of the solvency relief measure elected by the plan sponsor. If solvency payment schedules are consolidated or extended, future benefit enhancements would have to be funded over a maximum of five years on both a solvency and going-concern basis. This provision would remain in effect for up to five years following the start of special payments identified in the initial valuation report. Contribution holidays will not be permitted in fiscal years ending in 2010 to 2012 unless an actuarial cost certificate, based on an approximation from the last filed report, is filed annually with the Financial Services Commission of Ontario (FSCO) and the cost certificate confirms the plan was in a surplus position at the start of the fiscal year; or the plan is a designated plan under the Income Tax Act (Canada). Other Proposals The budget contained further proposals pertaining to retirement savings by: enhancing access to locked-in accounts by increasing, from 25 per cent to 50 per cent, the amount that can be unlocked under new Life Income Funds (LIFs), effective January 1, 2010 and special provisions will be made for current LIFs; temporarily waiving the financial-hardship application withdrawal fees for Ontario locked-in accounts, for applications approved on or after April 1, 2009; and amending the Succession Law Reform Act (SLRA) to expressly allow for the designation of beneficiaries under Tax-Free Savings Accounts (TFSAs), so that the death benefits can pass to the designated beneficiary without being subject to estate administration tax, simplifying estate matters and reducing costs. Aon Consulting Ready Special Issue March 26, 2009 revised April 13, 2009 page 4

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