Doing Business in Canada: Pensions and Benefits

by Bennett Jones LLP

Pensions and Benefits

Pension and benefit plans in Canada are delivered through a mix of public and private channels. Provincial governments provide basic universal health care to residents, while most employers supplement that coverage with private plans providing additional coverage for uninsured services. The federal government provides a modest set of pension programs to provide a basic level of retirement income that is supplemented by employer-sponsored pension plans and individual savings.

The provision of retirement income in Canada is based on the following:  1) government-sponsored retirement plans, 2) employer-sponsored pension plans, and 3) personal savings (tax-assisted and not). While the federal Income Tax Act (ITA) provides certain rules for employer-sponsored plans, the most prevalent kind of retirement plan – the registered pension plan – is also subject to federal or provincial pension minimum standards legislation.  Employers with operations across the country must comply with these various rules. Most employers in Canada also provide a variety of health and welfare benefits, typically through products delivered by private sector (e.g., insurance company) providers.

Government-Sponsored Retirement Plans

All employees in Canada engaged in virtually all employment participate in the Canada Pension Plan (CPP), except for employees in Québec who participate in a parallel scheme, the Québec Pension Plan (QPP). Both of these government plans are mandatory schemes and are funded by equal contributions from employers and employees. Employers are required to make or deduct and to remit such contributions from employees’ income at source. Currently, the employer contribution rate for the CPP is 4.95 percent on employment earnings above the basic exemption amount and below a yearly maximum ($48,300 in 2011), for a combined maximum contribution in 2011 of $4,435.20.  CPP/QPP provide certain benefits to their contributors, subject to eligibility, including a basic retirement pension, death and survivor benefits, and benefits for permanent disability. Two other federal programs supplement these plans:  Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). Both OAS and GIS are income-tested to some extent and are financed out of general tax revenues. These public plans only replace a modest amount of the pre-retirement income of a worker earning the average industrial wage.

Employer-Sponsored Retirement Plans

Unless mandated to do so by a collective bargaining agreement, employers in Canada need not establish a pension plan. However, once an employer voluntarily decides to establish a pension plan, it is subject to numerous statutory and regulatory requirements. The most prevalent type of employer-sponsored plan is the registered pension plan (RPP), which may be either defined benefit (DB) or defined contribution (DC), or both. DB plans are still common in the civil service (i.e., government departments) and the broader public sector (i.e., universities, hospitals, etc.) and in some unionized environments; but, DC pension plans are increasingly prevalent among Canadian employers. RPPs must comply with either federal or provincial pension benefits standards legislation and the ITA. 

Other common types of tax-assisted employer-sponsored plans include the group Registered Retirement Savings Plan (RRSP) and the Deferred Profit Sharing Plan (DPSP), commonly known as capital accumulation plans (CAPs). These latter plans (as well as DC pension plans) typically provide employees with investment choice, and are subject to a set of regulatory guidelines dealing with CAP governance and disclosure of information to CAP participants.

Common Law/Civil Code

In addition to pension and income tax legislation, the common law will apply to RPPs (except in Québec, which is governed by civil law through the Civil Code of Québec). Since the pension plan documents form the basis of the pension promise and often exceed statutory minimum standards, contractual or trust law principles are also used to determine the rights and obligations of plan sponsors, administrators, plan members and beneficiaries in relation to such issues as: surplus entitlement, the right to take contribution holidays and the use of plan assets to pay plan administrative expenses (which are also subject to detailed regulation under applicable pension benefits standards legislation). Civil actions alleging breach of contract, breach of trust or fiduciary duty, as well as negligent misrepresentation, are fairly prevalent in Canada.

Income Tax Act & Pension Benefit Statutes

All RPPs must comply with the ITA’s registration requirement to benefit from the tax-sheltering of contributions and the tax deferral of benefits. The ITA places limits on contributions to an RPP and restrictions on the types of benefits payable.

RPPs covering employees in federally regulated employment are subject to the Pension Benefits Standards Act, 1985 (PBSA). For all other employers, the provincial pension legislation of an employee’s province of employment applies. A memorandum of agreement between the provinces provides that pension plans are generally registered in the province where the plurality of plan members are employed.

Provincial pension statutes are similar (but not identical) and impose rules relating to such items as:

  • eligibility for membership;
  • vesting and locking-in of benefits;
  • retirement age;
  • benefits on retirement, death and termination of employment;
  • disclosure of information;
  • transfer rights;
  • funding and solvency requirements;
  • pension fund investments;
  • the responsibilities of the plan administrator; and
  • events such as plan terminations and asset transfers. 

Failure to comply with the ITA or pension standards legislation can lead to sanctions such as regulatory orders, fines, imprisonment and (in certain cases) the de-registration of the RPP.

Collective Bargaining Regime

Where a collective agreement requires the maintenance of an RPP, union consent may be necessary to amend the plan and disputes over plan administration will usually require recourse to arbitration instead of the courts. 

In certain sectors, a group of unrelated employers may agree to make stipulated contributions to an RPP which is not administered by the employer(s), usually pursuant to a collective agreement. Such multi-employer pension plans are typically administered by a board of trustees and are subject to specialized rules under pension and income tax legislation.

Supplementary or Top Up Plans

Employers may also provide supplementary or top up retirement plans to employees, particularly executives.  Such plans may either be funded or unfunded. If unfunded, they are paid from general revenues of the employer and, if funded, they will typically be classified as a Retirement Compensation Arrangement (RCA) under the ITA, which is subject to distinct tax treatment. As such plans are typically in the nature of a contractual promise to pay, the common law of contracts (or the civil law of obligations in Québec) also governs these types of arrangements.   

Health and Welfare Benefits

Employers often provide a variety of health and welfare benefit plans to their employees (and in some instances, retirees), such as:

  • group long-term disability insurance;
  • group life insurance;
  • accidental death and dismemberment insurance;
  • short-term disability;
  • dental care;
  • extended health care;
  • prescription drug; and
  • employee assistance plans.

These plans may be underwritten by insurers or provided on a self-insured “administrative services only” basis. As a result of recent legislative changes, employee life and health trusts now provide an opportunity to move health and welfare liabilities off an employer’s balance sheet or to segregate retiree benefits from those provided to active employees.


Employers must contend with a complex and, at times, contradictory regulatory regime. For example, federal income tax authorities seek to limit contributions made to pension plans, while federal and provincial pension regulators have an interest in maximizing funding and benefit security. The economic downturn of the past few years has increased pressure on employers providing DB pension plans in particular, with a number of jurisdictions acting to introduce various forms of solvency funding relief. Also, rules of general application outside of the province of Québec may not apply to an employer’s Québec operations.   

Bennett Jones Pensions and Benefits Law Group

The Bennett Jones LLP Pensions and Benefits Group provides pensions and benefits advice to a wide range of employers across industry sectors in Canada. We have extensive experience in helping new employers navigate the complex pensions and benefits regulatory environment. Our lawyers have specialized expertise in all aspects of pensions and benefits law issues including: regulatory compliance, pension plan administration and fund investment matters, review and interpretation of plan documentation, asset transfers, surplus issues, pension governance, and generally crafting solutions to the full range of pension issues facing the human resource and financial functions of companies. The first textbook for pensions law in Ontario was written by a member of our Group who is also the author of the forthcoming Halsbury’s Laws of Canada volume on pensions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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