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Canadian tax changes would allow phased retirement

Federal budget plan also backs proposals to improve health care

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OTTAWA—Canadian employers may benefit from several pension and health care proposals featured in the federal government's 2007 budget.

The key budget change from a pensions and benefits perspective relates to the government's decision to allow employers in all provinces to offer phased retirement programs.

Minister of Finance Jim Flaherty has proposed changing the federal Income Tax Act to allow for the development of phased retirement plans for employees who want to gradually reduce their workload while continuing to accrue pension benefits and employers who want to keep knowledgeable workers as long as possible.

Current income tax regulations prohibit phased retirement arrangements by preventing employees from accumulating pension benefits under a registered defined benefit plan if they receive a pension from the plan of the same or a related employer. The proposed change, though, would amend income tax rules to permit an employer to simultaneously pay a partial pension to an employee and provide further pension benefit accruals to the employee.

The change is designed to engage an older workforce to alleviate a looming labor shortage. Seniors comprise of 13% of Canada's population, a figure expected to double within the next 50 years, according to Statistics Canada.

"I think employers are going to have to find ways to encourage older skilled workers to remain in the workforce and this is one way to do that," said Scott Perkin, president of the Toronto-based Assn. of Canadian Pension Management, which represents plan sponsors in Canada.

Whether the phased retirement programs will be effective in keeping older employees in the workforce is uncertain given various barriers in the way of widespread adoption.

A key issue is the government's proposed requirement that employees who participate in phased retirement programs also be eligible for unreduced pensions, essentially meaning that only employees working for companies that allow retirement with an unreduced pension with 30 years of service or after a certain age (usually 60 or 62) would be able to utilize these programs. Employees and employers would find it more beneficial if employees could take advantage of phased retirement before becoming eligible for an unreduced pension, said Paul Forestell, a principal in the retirement business of Mercer Human Resource Consulting in Toronto. "I think that would be a real incentive to employees," he said.

Another issue is that most provinces, including Ontario, may need to amend their pension laws to accommodate the income tax changes.

Currently, only Alberta and Quebec provide for limited phased retirement programs, but the process is cumbersome because it requires a partial commutation of pension benefits to comply with the federal tax prohibition that results in a future reduction in pension benefits, experts say.

The federal budget also proposes amending federal tax law to allow people to defer the age at which they must start drawing funds from or convert their defined benefit plans or registered retirement savings plans--voluntary plans similar to individual retirement accounts in the United States--from 69 to 71.

The proposed budget does not require that plans be amended to accommodate the higher age limit, but employers that do not do so could face age discrimination lawsuits. "On its face that seems to be discriminatory," said Lisa Mills, an Ottawa-based partner with the pensions and benefits department of Hicks Morley Hamilton Stewart Storie L.L.P.

The majority of employers likely will amend their plans to increase the age limit. "It's a very simple change," said Jerry Loterman, senior retirement consultant for Hewitt Associates Inc. based in Toronto.

Health care proposals

On the health care side, the budget proposes allocating $300 million Canadian ($256.4 million) for a vaccine program to protect women from cervical cancer caused by the human papillomavirus. This measure could result in a small cost reduction for employers if the vaccine, which costs about $400 Canadian ($342), is currently covered under their benefits plan. A December 2006 survey by Hewitt found only 20% of Canadian employers cover the HPV vaccine and an additional 10% plan to cover the vaccine.

The government's decision to invest in covering the vaccine will alleviate likely pressure on employers from unions and employees, Ms. Mills said.

In addition, the federal government has proposed investing up to $612 million Canadian ($523 million) to support jurisdictions that have made commitments to implement patient wait time guarantees. Long wait times for governmental health care services have become a major issue since the Supreme Court of Canada ruled in Chaoulli vs. Quebec (Attorney General) that Quebec's ban on private insurance for health care services already provided by the province was unconstitutional (BI, June 20, 2005).

"Spending more tax dollars on the government health care monopoly has not been proven to reduce waiting times," said John Carpay, executive director of the Canadian Constitution Foundation, which is funding a suit to overturn Alberta's ban and plans to file a suit in Ontario in May.