Canadian Pension Plans: Tax Considerations For Employers

For many workers, retirement is an exciting prospect. They look forward to leaving the workforce and begin to enjoy simply living their lives. Supported by a variety of income sources, including Old Age Security (OAS) and the Canada Pension Plan (CPP), retired Canadians may choose to enjoy quiet days in their home or to go on adventures around the country and abroad. Employers may want to provide additional funds from which their retired employees can benefit, but they may not be aware of what their options are or the tax considerations of the various Canadian pension plans. If you have questions about setting up an employer pension plan for your employees, or the tax implications of doing so, consider contacting an experienced Canadian tax lawyer with Jeremy Scott Law at (902) 403-7201 to discuss your legal options. 

What Pension Options Exist for Employers?

Per the Government of Canada, every Canadian over the age of 18 outside Quebec and making more than $3,500 per year must contribute to the Canada Pension Plan. Those who live in Quebec contribute to the Quebec Pension Plan (QPP). These contributions are not optional in order to ensure that every working Canadian who meets the eligibility requirements has some sort of income after retirement. Typically, the employee contributes half and the employer contributes the other half. Self-employed people must make the entire contribution themselves. 

Some employers would like to offer their employees an additional benefit, beyond that provided by the CPP. These employers may be able to take advantage of other Canadian pension plans. A registered retirement savings plan (RRSP) is an individual, tax-deferred retirement account that is registered in the individual’s name with the CRA. A registered pension plan (RPP) is a group pension plan offered by employers. Within RPPs, there are three types: 

• Defined Contribution pension plan (DCPP): This plan defines the amount of money contributed to the account but does not define how much the employee will receive at retirement. The amount available at retirement will depend on the total amount contributed over time, as well as the returns on investments made with these contributions. Employers are required to contribute to these plans. 
• Defined Benefit pension plan (DBPP): This plan defines how much money the employee will receive at retirement. The amount is determined by a formula that includes the employee’s age, their income prior to retirement, and the length of time they worked for the employer. Both the employer and employee contribute to a DBPP. 
• Pooled Registration pension plan (PRPP): Also known as a voluntary retirement savings plan (VRSP) in Quebec, these plans are for the self-employed or other workers who would otherwise not have access to a workplace pension plan. 

Are Employer Pension Contributions Taxable in Canada?

Generally speaking, employer contributions to employer pension plans are taxable benefits for the employee. These contributions must be reported on the employee’s T4 slip, per the Canada Revenue Agency (CRA). Administration fees are also taxable and if GST/HST applies to these fees, both the fees and the taxes should be included in the value of the benefit. 

In two instances, however, taxes are handled differently: 

• If the employer is making a contribution to an employee’s RRSP and the employer reasonably believes that the employee can deduct the contribution for that year, they do not have to deduct income tax at the source (at the time of contribution).
• Contributions withheld from the employee’s remuneration and made on the employee’s behalf are not taxable for the employee because those amounts have already been taxed at the time of withholding and contribution. 

If you have questions about how employer pension contributions are taxed in Canada, Jeremy Scott Law may be able to assist you. 

Are Pension Plans Taxed in Canada?

When an employee retires and begins drawing from the CPP or QPP, the retiree will be taxed on those benefits in the year they receive them. This means an employee who retired in 2023 would pay taxes on those benefits as part of their taxes for 2023. Old Age Security benefits and private pensions are also taxed in the year in which the funds are received. 

How Are Employer Pensions Taxed?

The pensions offered by employers are generally considered to be “private” pensions, and are taxed in the year in which the withdrawals or distributions are received. Because the benefits are not taxed during the period of employment, the employer is not responsible for income tax on contributions to these pension plans. Instead, the retired employee will be responsible for paying income tax on the withdrawals or distributions of those pension plans. These taxes are often deducted at source (when the withdrawal or distribution is made), but if not, the retired employee can request this type of withholding. The retired individual can also request that additional taxes be withheld at source to lower the tax they owe when filing their return, spreading their total tax liability over the course of the year. 

Is the Canadian Pension Plan Taxable in the United States?

According to the United States Internal Revenue Service (IRS), under Article XVIII, Canadian pension plans and annuities that are paid to United States residents are subject to being taxed by Canada and may be taxed by the United States as well. However, the amount included as income for United States tax purposes cannot be more than would have been included in Canadian income. This rule applies to all pension plans in Canada, including CPP, QPP, and private pensions through employers.

Additionally, RRSPs or registered retirement income funds (RRIF) are currently subject to United States income tax as well, even if the money is not distributed. However, the individual can elect to defer the United States tax until the money is distributed. 

Do You Have Other Questions About Canadian Pension Plans? 

Canadian pension plans, and their tax implications for employers, can raise a number of questions regarding their relative tax advantages and the benefits the different plans may offer. Whether you have questions regarding how to set up a pension plan for your employees, how such a plan affects taxes for you as the employer, or making sure that you are making contributions properly throughout the year, the assistance of an experienced Nova Scotia business tax lawyer may make things easier. Consider calling a knowledgeable tax lawyer with Jeremy Scott Law at (902) 403-7201 to discuss your employee pension tax planning needs.