Finance minister says changes meant to "codify a long-standing practice" of the CPP
The federal government has introduced a number of proposals to amend the Canada Pension Plan (CPP) legislation to clarify the rules governing employer contributions.
Finance Minister Ralph Goodale said the proposals related to employer contributions that are in excess of required amounts and the withholding and remittance of CPP contributions by employers.
“These changes are intended to codify a long-standing practice of the CPP and to preserve its financial stability,” said Goodale. “They do not affect CPP contribution rates and leave CPP benefits unchanged.”
Basically, the changes would more clearly set out that the amount an employer must contribute for a year for a given employee is equal to the amount that must be remitted at source by that employer for the employee and does not take into account any amounts remitted by other employers of that employee in the year. Only amounts in excess of this required amount for the year will be eligible for recovery by the employer.
These changes are proposed to be effective from March 18, 2003, and will apply to recoveries of overpayments in respect of current and previous tax years.
In addition, the changes will deem employment to be continuous in cases where there is a change in the corporate structure of an employer, provided there has been no interruption of service by employees. Currently, employees in such circumstances are sometimes treated as if they had joined a new employer. As a result, employers are required to begin withholding and making CPP contributions anew, even though the employer and employee may already have made the maximum annual contribution.
Under the proposed change, this would no longer be the case. The change would be effective Jan. 1, 2004, following the passage of legislation.
The proposed changes ensure the continued protection of employee privacy and limit incentives for discriminatory hiring practices.
Both the proposed changes will also ensure that employers are treated similarly regardless of where in Canada they operate. On Dec. 12, 2003, the Quebec government proposed similar clarifications to the legislative rules governing employer contributions to the Quebec Pension Plan (QPP). Moreover, the QPP already deems employment as continuous following a change in corporate structure. In both cases, the proposed changes to the CPP will ensure harmonization between the CPP and the QPP.
How the proposed changes affect the recovery of employer overpayments and the withholding and remittance of CPP contributions
The following text came from a backgrounder issued by the Department of Finance:
Under section 21 of the current CPP legislation, each employer must remit to the CPP a contribution equal to the amount that must be withheld at source as an employee contribution.
Under section 8, the amount that must be withheld at source for an employee in any given pay period corresponds to the amount obtained by multiplying the employee contribution rate (4.95 per cent in 2003) by the excess of the contributory salary and wages paid to the employee during the remuneration period over the portion of the $3,500 yearly basic exemption (YBE) attributable to the remuneration period.
Section 38 of the CPP legislation further provides for the refunding to employees and to employers of any contributions paid in excess of required amounts. For employees, these “overpayments” are expressly defined in subsection 8(2). An employee is deemed to have contributed in excess of the required amount in the year if the total of all amounts deducted as required from their remuneration for the year, whether by one or more employers, exceeds an amount equal to the product obtained when the employee contribution rate is multiplied by the lesser of:
•The employee’s maximum contributory earnings for the year.
•The employee’s contributory salary and wages for the year, plus the employee’s contributory self-employed earnings for the year, less the employee’s basic exemption for the year.
Provision is made for the refund of overpayments through the tax system.
For employers, the amount of the employer’s contribution is set out in Section 9, but the legislation does not expressly define the circumstances under which excess contributions occur. Section 38(3) simply states that employers are eligible to receive a refund for any contributions paid in excess of the amounts required, provided application is made in writing within four years after the end of the year in which the excess contribution occurred.
Proposed clarification
It is proposed to make explicit in the legislation that, in accordance with long-standing practice, the amount an employer must contribute for a year for a given employee is equal to the amount that must be remitted at source by that employer for the employee and does not take into account any amounts remitted by other employers of that employee in the year. Further, it will be made clear that only amounts in excess of this required amount for the year will be eligible for recovery by the employer.
Under both the Canada Pension Plan and the Quebec Pension Plan, employer contributions (and hence the base for determining whether the employer has over-paid) have been based on the earnings during the remuneration period of the employee with that employer.
The effect of this long-standing practice was to protect employee privacy. For instance, if employers (particularly those with few employees) were entitled to a refund of contributions under the same circumstance as their employees, employers could determine, from the refund they received, that the employee had other employment (and, in some cases, the earnings from that employment).
Recently, however, the interpretation of the legislative provisions relating to employer contribution refunds has been considerably broadened by the Federal Court of Appeal in Agpro Services v. The Minister of National Revenue. The decision held that an employer may be entitled to the same refund of contributions as the one received by his employees, since the current wording of the CPP legislation suggests that employees and employers must pay a contribution to the CPP that is identical in amount.
This interpretation, if left to stand, would significantly narrow the financial manoeuvring room of the plan. The chief actuary of the CPP, who has statutory responsibility for evaluating the financial position of the plan, will prepare a detailed actuarial assessment of the proposed changes following tabling of legislation.
The proposed amendments to the CPP would ensure the practice in place since the inception of the Canada Pension Plan and the Quebec Pension Plan is maintained. On Dec. 12, 2003, Quebec announced its intention to proceed with similar amendments to the QPP.
The proposed changes to the CPP will be effective from March 18, 2003 and will apply to recoveries of overpayments in respect of any current tax year and the four previous tax years.
Proposed changes to employer contributions in the event of changes in business structure
When an employer is restructured – notably as a result of a winding-up and immediate reconstitution under a different legal structure (for example, where a limited partnership is reconstituted as a corporation) or the acquisition of a major portion of the employer’s property or of a distinct part of the employer’s business (for example, a distinct division of a business is sold to another enterprise) – employees are treated as if they had joined new employers. As a result, employers are required to begin making and withholding CPP contributions anew. They cannot take into account the contributions made or withheld by the employee’s “previous” employer – even if there has been no interruption of service by the employee.
As a result, the sum of the contributions made or withheld by the "previous" employer and the "restructured" employer on the earnings of the employee may exceed the annual maximum contribution for the employee.
The legislation provides for a refund of contributions to employees for any payments made in excess of the annual maximum contribution.
In the case of the employer, however, the employment is considered successive (not with the same employer). In this case, neither the "restructured" employer nor the "previous" employer has made a contribution in excess of the annual maximum for the employee in their employment and no refund is provided.
While this practice was designed to protect employee privacy, this is not at issue in the case of restructurings described above: in instances of changes in business structure, the "restructured" employer has access to the employment records of the "previous" employer. The current provisions thus create unwarranted impediments to certain business restructurings.
Proposed clarification
The proposed changes will deem such employees to have had continuous employment with the "restructured" employer.
The Canada Revenue Agency Bulletin IT474R, Amalgamations of Canadian Corporations provides that a statutory amalgamation under the laws of Canada or any of the provinces does not result in the new corporation being treated as a new employer for the purposes of the Canada Pension Plan.
Therefore, where there has been such an amalgamation at some point in the calendar year, the bulletin provides that the contributions by employees and by the predecessor corporations before the amalgamation should be taken into account in determining the required contribution to be made after the amalgamation. For instance, where the year’s maximum contribution in respect of an employee had been made prior to the amalgamation by both the employee and the predecessor corporation that employed the employee, the new amalgamated company is not required to make further contributions for that employee.
The proposed changes would also expressly incorporate this interpretation into the CPP legislation and extend it to other forms of business restructuring.
In particular, when an employer is restructured as a result of a winding-up and immediate reconstitution under a different legal structure or the acquisition of all, substantially all or a distinct division of the employer’s property by another employer, employees with uninterrupted employment with the employer will be deemed to have continuous employment with the successor employer for the purposes of the CPP.
The Quebec Pension Plan legislation has had similar provisions in place since 1981. On December 12, 2003, the government of Quebec announced clarifications to these provisions in light of the Agpro decision.
The changes to the corresponding CPP provisions are proposed to be effective as of January 1, 2004.
Finance Minister Ralph Goodale said the proposals related to employer contributions that are in excess of required amounts and the withholding and remittance of CPP contributions by employers.
“These changes are intended to codify a long-standing practice of the CPP and to preserve its financial stability,” said Goodale. “They do not affect CPP contribution rates and leave CPP benefits unchanged.”
Basically, the changes would more clearly set out that the amount an employer must contribute for a year for a given employee is equal to the amount that must be remitted at source by that employer for the employee and does not take into account any amounts remitted by other employers of that employee in the year. Only amounts in excess of this required amount for the year will be eligible for recovery by the employer.
These changes are proposed to be effective from March 18, 2003, and will apply to recoveries of overpayments in respect of current and previous tax years.
In addition, the changes will deem employment to be continuous in cases where there is a change in the corporate structure of an employer, provided there has been no interruption of service by employees. Currently, employees in such circumstances are sometimes treated as if they had joined a new employer. As a result, employers are required to begin withholding and making CPP contributions anew, even though the employer and employee may already have made the maximum annual contribution.
Under the proposed change, this would no longer be the case. The change would be effective Jan. 1, 2004, following the passage of legislation.
The proposed changes ensure the continued protection of employee privacy and limit incentives for discriminatory hiring practices.
Both the proposed changes will also ensure that employers are treated similarly regardless of where in Canada they operate. On Dec. 12, 2003, the Quebec government proposed similar clarifications to the legislative rules governing employer contributions to the Quebec Pension Plan (QPP). Moreover, the QPP already deems employment as continuous following a change in corporate structure. In both cases, the proposed changes to the CPP will ensure harmonization between the CPP and the QPP.
How the proposed changes affect the recovery of employer overpayments and the withholding and remittance of CPP contributions
The following text came from a backgrounder issued by the Department of Finance:
Under section 21 of the current CPP legislation, each employer must remit to the CPP a contribution equal to the amount that must be withheld at source as an employee contribution.
Under section 8, the amount that must be withheld at source for an employee in any given pay period corresponds to the amount obtained by multiplying the employee contribution rate (4.95 per cent in 2003) by the excess of the contributory salary and wages paid to the employee during the remuneration period over the portion of the $3,500 yearly basic exemption (YBE) attributable to the remuneration period.
Section 38 of the CPP legislation further provides for the refunding to employees and to employers of any contributions paid in excess of required amounts. For employees, these “overpayments” are expressly defined in subsection 8(2). An employee is deemed to have contributed in excess of the required amount in the year if the total of all amounts deducted as required from their remuneration for the year, whether by one or more employers, exceeds an amount equal to the product obtained when the employee contribution rate is multiplied by the lesser of:
•The employee’s maximum contributory earnings for the year.
•The employee’s contributory salary and wages for the year, plus the employee’s contributory self-employed earnings for the year, less the employee’s basic exemption for the year.
Provision is made for the refund of overpayments through the tax system.
For employers, the amount of the employer’s contribution is set out in Section 9, but the legislation does not expressly define the circumstances under which excess contributions occur. Section 38(3) simply states that employers are eligible to receive a refund for any contributions paid in excess of the amounts required, provided application is made in writing within four years after the end of the year in which the excess contribution occurred.
Proposed clarification
It is proposed to make explicit in the legislation that, in accordance with long-standing practice, the amount an employer must contribute for a year for a given employee is equal to the amount that must be remitted at source by that employer for the employee and does not take into account any amounts remitted by other employers of that employee in the year. Further, it will be made clear that only amounts in excess of this required amount for the year will be eligible for recovery by the employer.
Under both the Canada Pension Plan and the Quebec Pension Plan, employer contributions (and hence the base for determining whether the employer has over-paid) have been based on the earnings during the remuneration period of the employee with that employer.
The effect of this long-standing practice was to protect employee privacy. For instance, if employers (particularly those with few employees) were entitled to a refund of contributions under the same circumstance as their employees, employers could determine, from the refund they received, that the employee had other employment (and, in some cases, the earnings from that employment).
Recently, however, the interpretation of the legislative provisions relating to employer contribution refunds has been considerably broadened by the Federal Court of Appeal in Agpro Services v. The Minister of National Revenue. The decision held that an employer may be entitled to the same refund of contributions as the one received by his employees, since the current wording of the CPP legislation suggests that employees and employers must pay a contribution to the CPP that is identical in amount.
This interpretation, if left to stand, would significantly narrow the financial manoeuvring room of the plan. The chief actuary of the CPP, who has statutory responsibility for evaluating the financial position of the plan, will prepare a detailed actuarial assessment of the proposed changes following tabling of legislation.
The proposed amendments to the CPP would ensure the practice in place since the inception of the Canada Pension Plan and the Quebec Pension Plan is maintained. On Dec. 12, 2003, Quebec announced its intention to proceed with similar amendments to the QPP.
The proposed changes to the CPP will be effective from March 18, 2003 and will apply to recoveries of overpayments in respect of any current tax year and the four previous tax years.
Proposed changes to employer contributions in the event of changes in business structure
When an employer is restructured – notably as a result of a winding-up and immediate reconstitution under a different legal structure (for example, where a limited partnership is reconstituted as a corporation) or the acquisition of a major portion of the employer’s property or of a distinct part of the employer’s business (for example, a distinct division of a business is sold to another enterprise) – employees are treated as if they had joined new employers. As a result, employers are required to begin making and withholding CPP contributions anew. They cannot take into account the contributions made or withheld by the employee’s “previous” employer – even if there has been no interruption of service by the employee.
As a result, the sum of the contributions made or withheld by the "previous" employer and the "restructured" employer on the earnings of the employee may exceed the annual maximum contribution for the employee.
The legislation provides for a refund of contributions to employees for any payments made in excess of the annual maximum contribution.
In the case of the employer, however, the employment is considered successive (not with the same employer). In this case, neither the "restructured" employer nor the "previous" employer has made a contribution in excess of the annual maximum for the employee in their employment and no refund is provided.
While this practice was designed to protect employee privacy, this is not at issue in the case of restructurings described above: in instances of changes in business structure, the "restructured" employer has access to the employment records of the "previous" employer. The current provisions thus create unwarranted impediments to certain business restructurings.
Proposed clarification
The proposed changes will deem such employees to have had continuous employment with the "restructured" employer.
The Canada Revenue Agency Bulletin IT474R, Amalgamations of Canadian Corporations provides that a statutory amalgamation under the laws of Canada or any of the provinces does not result in the new corporation being treated as a new employer for the purposes of the Canada Pension Plan.
Therefore, where there has been such an amalgamation at some point in the calendar year, the bulletin provides that the contributions by employees and by the predecessor corporations before the amalgamation should be taken into account in determining the required contribution to be made after the amalgamation. For instance, where the year’s maximum contribution in respect of an employee had been made prior to the amalgamation by both the employee and the predecessor corporation that employed the employee, the new amalgamated company is not required to make further contributions for that employee.
The proposed changes would also expressly incorporate this interpretation into the CPP legislation and extend it to other forms of business restructuring.
In particular, when an employer is restructured as a result of a winding-up and immediate reconstitution under a different legal structure or the acquisition of all, substantially all or a distinct division of the employer’s property by another employer, employees with uninterrupted employment with the employer will be deemed to have continuous employment with the successor employer for the purposes of the CPP.
The Quebec Pension Plan legislation has had similar provisions in place since 1981. On December 12, 2003, the government of Quebec announced clarifications to these provisions in light of the Agpro decision.
The changes to the corresponding CPP provisions are proposed to be effective as of January 1, 2004.
