15 February 2016 Global Tax Alert News from Americas Tax Center Canada: Ontario unveils details of retirement pension plan EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: http://www.ey.com/us/en/services/ Tax/Americas-Tax-Center---borderlessclient-service Executive summary On 26 January 2016, the Ontario Government announced it has completed the design of the Ontario Retirement Pension Plan (ORPP), which will be phased in starting 1 January 2017, subject to legislative approval. Similar to the Canada Pension Plan (CPP), the ORPP is designed to help Ontario workers save toward their retirement so they can retire with greater financial security. The ORPP will be introduced in 2017 and, by 2020, subject to legislative approval, every employee in Ontario will be part of either the ORPP or a comparable workplace pension plan. Once it s fully phased in, participating employees earning greater than $3,500 annually and without access to a comparable workplace pension plan will contribute 1.9% of their annual earnings up to $90,000, with matching contributions by employers (3.8% in total). Employers must participate in the ORPP unless they offer a comparable workplace pension plan. Employers need to review how this new legislation will impact them and whether they will need to contribute into the ORPP.
2 Global Tax Alert Americas Tax Center Detailed discussion Background Although Canada and Ontario have a variety of retirement benefit programs (CPP, Old Age Security, the Guaranteed Income Supplement and the Ontario Guaranteed Annual Income System), studies have shown that many Ontarians are not saving enough to maintain their standard of living when they retire. The primary reasons for this are individuals are not saving enough, workplace pension coverage is low and people are living longer than ever before. The Government of Ontario addressed this issue in the 2014 Ontario budget by proposing the ORPP, a new mandatory provincial pension plan that would enable Ontarians to build a more secure retirement future. The Ontario Government is moving forward with the ORPP as a priority and is committed to establishing the plan by 1 January 2017. How the ORPP works Comparable workplace pension plans Employers and employees who participate in a comparable pension plan will not be required to participate in the ORPP. Ontario is defining a comparable plan as a registered pension plan that is subject to federal and provincial government regulation and that meets certain minimum thresholds. A comparable pension plan for Ontario is a plan that: Provides people with a predictable stream of income for life Provides people with security Requires contributions from employers to ensure fairness Aims to replace up to 15% of a person s pre-retirement income Defined benefit pension plans In a defined benefit plan, an employer promises a specific monthly benefit upon retirement, based on a formula that is known in advance. Both employers and employees make contributions to the plan. When an employee retires, they receive a predetermined retirement income that is paid for life. The amount of money they receive is calculated based on things like salary, length of employment (or years of service) and age. To be considered comparable, define benefit plans must match or exceed the benefit being offered through the ORPP. For earnings-based defined benefit plans (where an employee s earnings history is considered as part of their retirement income calculation), the annual benefit accrual rate must be at least 0.5% to be considered comparable. Defined contribution pension plans Under a defined contribution plan, both the employer and employee contribute a set amount of money into the plan. The income upon retirement is based on the amount of money paid in and the growth of the investments in the plan. As a result, defined contribution plans do not provide a predictable stream of retirement income. For a workplace defined contribution plan to be able to reliably deliver the same level of income replacement in retirement as the ORPP, it must have a minimum total contribution of 8% of base salary earnings and the employer must contribute at least 50% of the employee s contribution (4% of base salary earnings). Other retirement savings plans Flat-benefit defined benefit plans, flat-dollar defined contribution plans, multi-employer pension plans and pooled registered pension plans would need to be reviewed to determine if they qualify as comparable workplace pension plans. Group registered retirement savings plans (GRRSPs) and deferred profit sharing plans (DPSPs) will not be considered comparable under the ORPP. Administration, registration and verification The Ontario Retirement Pension Plan Administration Corporation (ORPP AC), the professional, independent organization responsible for administering the ORPP, will be contacting all Ontario employers in early 2016 to determine if they have comparable workplace pension plans and whether they will need to register in the ORPP. The ORPP AC would: Set up the ORPP Register plan members Collect and invest contributions
Global Tax Alert Americas Tax Center 3 Employer implications To support businesses as they plan and adjust, enrollment in the ORPP will be phased in over time. No employer or employee will make contributions to the ORPP until 2017. The process of verifying comparable workplace pension plans and enrolling businesses will begin in 2016. Details on enrollment, contribution rates and phase-in for employers and employees are subject to legislative approval. Phased-in enrollment schedule Type of employer 2017 2018 2019 2020 2021 Wave 1: >500 employees without registered workplace plans 0.8% 1.6% 1.9% 1.9% 1.9% Wave 2: 50-499 employees without registered workplace plans 0% 0.8% 1.6% 1.9% 1.9% Wave 3: 49 or fewer employees without registered workplace plans 0% 0% 0.8% 1.6% 1.9% Wave 4: Employers with registered plans that do not meet test 0% 0% 0% 1.9% 1.9% Employee implications The ORPP is mandatory for full-time and part-time employees without a comparable workplace pension plan. Employees will contribute up to 1.9% of their annual earnings up to $90,000. The maximum contribution for the employee will be $1,644 annually with a matching contribution by the employer (to be indexed). To contribute to the ORPP, employees must: Be an eligible employee between the ages of 18 and 70 Earn a minimum of $3,500 annually Not already be enrolled in a comparable workplace pension plan The ORPP is designed to provide an employee with a 15% income replacement rate after contributing to the plan over 40 years. When the employee retires, their pension benefit would be calculated using your average earnings over the years they contributed to the plan. One will be eligible to start receiving a pension at age 65 after making contributions to the ORPP, with options to receive adjusted retirement income as early as age 60 or as late as age 71. One is considered to be employed in Ontario if they work in Ontario or are paid salary and wages from an employer in Ontario, including employees who work from home offices. Self-employed individuals are currently not included in the ORPP. However, the Ontario government is working with the federal government on ways to include federally regulated employees in the ORPP. Nonresidents providing services in Ontario Canada s social security agreements will not exempt a foreign employee from the ORPP. The ORPP will apply unless the employee is exempt from income tax pursuant to a treaty. We will be asking the Government of Ontario to provide additional guidance for foreign employees participating in foreign pension plans that are comparable to the ORPP. Next steps Ontario employers will need to review their company pension plans to see if they meet the conditions of the ORPP and either amend their plans or be prepared to join the ORPP. The ORPP AC will be contacting all Ontario employers shortly, so be prepared to respond.
4 Global Tax Alert Americas Tax Center For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Toronto Dina Papadopoulos +1 416 943 3314 dina.papadopoulos@ca.ey.com Uros Karadzic +1 416 943 2087 uros.karadzic@ca.ey.com Jo-Anne VanStrien +1 416 943 3192 jo-anne.vanstrien@ca.ey.com Ernst & Young LLP (Canada), Montreal Danielle Laramée +1 514 874 4360 danielle.laramee@ca.ey.com
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