2018 Federal Budget: Goodbye Health and Welfare Trusts; Hello Expanded Parental Leave

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1 February 27, Federal Budget: Goodbye Health and Welfare Trusts; Hello Expanded Parental Leave T he 2018 Federal Budget, Equality + Growth, A Strong Middle Class (Budget), was tabled by Finance Minister Bill Morneau on February 27, Key announcements of interest to employers and benefits plan sponsors include: Elimination of health and welfare trusts (HWTs) in favour of Employee Life and Health Trusts (ELHTs); Introduction of a new Parental Sharing Benefit through the Employment Insurance (EI) program; Consultations on a national pharmacare program; Additional enhancements to the Canada Pension Plan (CPP); Consultations aimed at enhancing pension protections in the event of a plan sponsor s bankruptcy; Consultations aimed at addressing the issue of unclaimed pension balances; and Introduction of pay equity legislation and new leaves of absence for federally regulated employees. This Special Notice provides a summary of the key Budget measures, and their impact on employers and plan sponsors. 1 A MEMBER OF ABELICA GLOBAL

2 The End of HWTs Health and Welfare Trusts (or HWTs) are trusts established by benefits plan sponsors to provide health and welfare benefits to their employees or members. However, these trusts are not explicitly addressed in the Income Tax Act (ITA). In the absence of specific ITA provisions, the Canada Revenue Agency (CRA) has published administrative positions on the rules and requirements applicable to such trusts, as well as the Income Tax Folio S2-F1-C1, Health and Welfare Trusts, effective November 28, 2015 (Folio). Employee Life and Health Trusts (ELHTs) are trusts that provide specific group life insurance, private health service plans, and group sickness and accident benefits to employees or members. While many of the ITA provisions for ELHTs are similar to CRA s guidance on HWTs, a number of issues are handled differently for example, tax deductibility of contributions, definition of eligible dependents, treatment of surplus, key person restrictions and computation of taxes on investment earnings. The Budget proposes requiring all existing HWTs to convert to ELHTs or wind up by the end of Transitional rules will be added to the ITA to facilitate conversions, along with guidance on winding up HWTs. Starting in 2021, only ELHTs will be permissible, and any remaining HWTs will be subject to the normal tax rules for trusts. The Budget also notes that existing CRA guidance will not apply to any new HWTs established after February 27, 2018, and any new trusts will therefore be required to satisfy the ELHT rules to qualify for preferential tax treatment. Stakeholders can provide comments on transitional issues by June 29, When ELHT s were introduced, the expectation was that the use of HWTs would end, although related legislation was not enacted at the time. In the meantime, they issued further guidance for HWTs in the Folio, which clarified certain tax issues for HWTs, such as the prohibition against permanent surplus. Since then HWTs have been assessing the implications for their contributions and funding to become (or remain compliant) with the Folio. ELHTs provide legislative certainty, given their codification in the ITA. Certain other problematic aspects of HWTs don t exist for ELHTs, such as the express ability to provide benefits to dependents and retirees. HWTs will need to assess all the implications of conversion. We anticipate more details on the transition once the public consultation has been completed later in June FEDERAL BUDGET

3 New EI Parental Sharing Benefit Consistent with its stated aim of supporting greater gender equality in the workplace by encouraging both parents to share in the work of raising their children, the government intends to amend the Employment Insurance Act (EI Act) to introduce a new Parental Sharing Benefit. Starting in June 2019, this benefit will provide an additional period of use it or lose it EI parental benefits if both parents agree to share parental leave (it is not available if only one spouse takes parental leave). The additional leave will be five weeks for recipients of standard EI parental leave benefits, and eight weeks for recipients of extended family leave benefits. Originally introduced in the 2017 Budget, extended EI parental leave benefits allow claimants to receive benefit payments at a lower rate (33% of salary versus 55%), for a longer period (up to 61 weeks versus 35 weeks). The proposed benefit will be available to eligible two-parent families, including adoptive and same-sex couples, to take at any point following the arrival of their child. Employers should review their existing parental leave provisions to make sure they are aligned with this new benefit. Since these are federal changes, provincial employment standards will also need to be amended to address the Parental Sharing Benefit. Whereas the Budget states that the Canada Labour Code will be amended to address this leave for federally regulated employees, provincially regulated employers will need to decide whether to act now or wait until the related provincial legislation is updated. Employers offering parental leave top-up benefits for the maximum available leave period (which are discretionary) should review their current policies and consider adjusting payments in light of the longer leave period. Is National Pharmacare on the Horizon? The Budget signals that the federal government may finally be getting serious about developing and implementing a national pharmacare program including the creation of an Advisory Council on the Implementation of National Pharmacare (Council). The Council will be chaired by Dr. Eric Hoskins, who stepped down as Ontario s Minister of Health yesterday to take on this role. The Council will begin a national dialogue with experts and leaders from all levels of government and the Indigenous community. Reporting to the Minister of Health and the Minister of Finance, the Council will recommend options on how Canada can move forward with a national pharmacare program. Adopting a national pharmacare program would have significant cost implications for employers offering prescription drug benefits. The impact will depend on the size and scope of the formulary, the coverage levels and maximums, and whether the public program will be first or second payer of drug costs for eligible employees FEDERAL BUDGET

4 More CPP Enhancements CPP enhancements will start in 2019, further to the June 2016 agreement between the federal and provincial governments. Building on these enhancements, the Budget announces that the federal government will introduce legislation to implement the following changes to the CPP (based on a December 2017 federal/provincial agreement): Increase benefits payable under the enhanced CPP for contributors with severe and prolonged disabilities, as well as parents who take time off work to care for young children. When calculating their CPP retirement pension, these contributors will be credited with an amount linked to their previous earnings for periods with low earnings or spent out of the workforce; Pay a full survivor s pension to individuals under age 45 who lose their spouse, rather than paying a reduced pension linked to the survivor s age; Provide a top-up disability benefit paid to retirement pension recipients under age 65 who are disabled and meet eligibility requirements; and Increase the death benefit to its maximum value of $2,500 for all eligible contributors. The above changes, scheduled to take effect in 2019, will not result in an increase to contribution rates. When the initial CPP enhancements were finalized, the ITA was amended to make employee contributions toward the enhanced CPP tax deductible. Quebec announced its own series of reforms to the Quebec Pension Plan (QPP) similar to the CPP enhancements in November To provide consistent income tax treatment of CPP and QPP contributions, the Budget proposes amending the ITA to provide a deduction for employee contributions to the enhanced portion of the QPP. This measure will apply to 2019 and subsequent tax years, consistent with the phased adoption of the QPP enhancements. The proposed increase to benefits payable under the CPP enhancement appears to operate differently than the drop-out provisions currently available for the basic CPP benefit. Under the existing drop-out rules, periods of no or low earnings are excluded from an individual s contributory period. This proposal would include these periods when determining the contributory period for the enhanced CPP benefit, but would credit the individual with deemed earnings for the period based on their earnings immediately before the period in question FEDERAL BUDGET

5 Protections for Pensions in Bankruptcy In response to the unexpected pension losses experienced by workers from a number of companies entering the insolvency process with substantial unfunded pension liabilities, the federal government has announced it will be consulting with stakeholders on the issue of retirement income security. The Budget notes that Canadians deserve more peace of mind when it comes to their retirement and companies must act in good faith towards their employees. The pending consultations are intended to lead to the development of a whole-of-government, evidence-based approach towards addressing retirement security for all Canadians. While provincial pension legislation contains deemed trust provisions designed to protect plan members in the event of a plan sponsor s insolvency, the terms of the federal Bankruptcy and Insolvency Act (BIA) and/or the Companies Creditors Arrangements Act (CCAA) invalidate those protections because federal legislation takes precedence under what is known as the doctrine of federal paramountcy. As a result and since the federal government has no jurisdiction over provincial pension legislation any enhanced protection for pensioners of bankrupt employers added due to the upcoming consultations will likely be made through amendments to the BIA/ CCAA. Eckler will monitor the progress of the consultation process, and will provide additional information as it becomes available. Addressing Unclaimed Pension Balances The government is also considering addressing the problems posed to plan administrators relating to unclaimed pension balances. The Budget states the government will shortly launch public consultations on a regime to address these balances, which may lead to legislative and regulatory amendments. A national approach to handling unclaimed pension balances would be welcome news for plan sponsors. Currently, only British Columbia and Quebec have mechanisms in place to handle these funds. While Ontario has proposed creating a registry of missing plan members, it has not yet proposed a centralized repository for the pension amounts associated with these members. In the absence of a provincial or federal alternative, administrators are generally required to pay unclaimed funds into court, where possible, or attempt to develop other innovative solutions FEDERAL BUDGET

6 Pay Equity and Family Violence Leave for Federally Regulated Employers/Employees In addition to the new EI Parental Sharing Benefit, the Budget contains other significant measures impacting federally regulated employers and employees: Pay equity legislation: The government will soon introduce pay equity legislation applicable to employers with 10 or more employees. This legislation, including implementation timelines and mandatory maintenance reviews, will be designed to ensure that, on average, male and female workers receive the same pay for work of equal value. In addition, it will ensure that wages and other benefits are evaluated in a gender-neutral way. The law will also apply to the Federal Contractors Program on contracts worth at least $1 million. Family violence leave: The government will amend the Canada Labour Code (CLC) to provide five days of paid leave to workers who are victims of family violence, or who are parents of children who are victims of family violence. Several provinces already offer (or have introduced legislation to provide) this type of leave. Eckler will monitor the remaining provinces to determine whether they will amend their legislation in light of the pending CLC changes. Other Budget Measures Combatting workplace sexual harassment: The government will invest $50.4 million over five years to address sexual harassment in the workplace. The funding will include increasing legal aid funding across Canada to support victims of workplace sexual harassment, and developing a pan-canadian outreach program to better inform workers about their rights and how to get help if they need it. Taxing cannabis: As Canada moves forward with the legalization of cannabis, the government is proposing an excise duty framework for cannabis products. The amount of the duty is expected to be the higher of $1 per gram or 10% of the product price, with the resulting revenue divided between the provincial/territorial and federal governments (75% and 25%, respectively). Federal revenue will be capped at $100 million annually for the first two years following legalization, with any excess going to the provincial/territorial governments. The framework is expected to apply to products containing Tetrahydrocannabinol (THC) the primary psychoactive compound of cannabis. Low-THC cannabidiol oils, which can be used to treat children with certain medical conditions (such as epilepsy), will generally be exempt from duty. The same is true of cannabis-derived pharmaceutical products with a Drug Identification Number (DIN) that can only be acquired with a prescription. The government will also explore establishing a rebate program to retroactively reimburse Canadians for the federal portion of the duty paid on products that were subsequently given DINs FEDERAL BUDGET

7 Research and support for autism spectrum disorder: The Budget commits $20 million over five years for two new initiatives to better support Canadians with autism spectrum disorder and their families: Creating an Autism-Intellectual-Developmental Disabilities National Resource and Exchange Network (AIDE) to develop online resources, an inventory of services, employment opportunities and local programming for families across the country, based on their specific needs. Funding to the Public Health Agency of Canada for community-based projects supporting innovative program models, reducing stigma around autism spectrum disorder and supporting the integration of health, social and educational programs to better serve the complex needs of families. Medical expense tax credit (METC) and service animals: The METC is a 15% non-refundable tax credit that recognizes the effect of above-average medical- and disability-related expenses on an individual s ability to pay tax. Current rules provide that eligible expenses relating to service animals (including their purchase, care and training) are eligible for the METC if they are incurred in connection with a specially trained animal designed to assist an individual coping with specific conditions, including blindness, severe autism and severe epilepsy. The Budget proposes expanding the list of METC-eligible expenses to recognize the costs associated with service animals that help patients cope with post-traumatic stress disorder (PTSD). Expenses will not be eligible if they are in respect of an animal that provides comfort or emotional support but has not been specially trained. This measure will apply in respect of eligible expenses incurred after This Special Notice has been prepared for general information purposes only and does not constitute professional advice. Should you require professional advice based on the contents of this Notice, please contact an Eckler consultant. 7 Copyright 2018 Eckler Ltd. All rights reserved. Halifax Toronto Barbados Montreal Winnipeg Jamaica Connect 2018 FEDERAL with us: BUDGET Quebec City Vancouver eckler.ca