Interview with Lisa Chamzuk: What happens to benefits if retirees return to work?December 21, 2017
Today I’m interviewing Lisa Chamzuk, a partner in the pension and employee benefits group at the Vancouver law firm of Lawson Lundell LLP for savewithspp.com. With an increasing number of employees opting to work beyond age 65, or coming back to work after retirement, many questions arise as to what, if any, pension accrual and healthcare benefits older workers can expect to receive from their employers.
So that’s Lisa and I are going to talk about today. Thank you for joining me, Lisa.
Thank you for having me.
Q: If an employee retires and starts receiving a pension from the company pension plan and decides to come back to the same employer, can this individual accrue additional pension?
A: Generally speaking, no. It depends a little bit on the type of pension plan where the pension accrued and from which the member is collecting the pension. There is a rule in the Income Tax regulations that prohibits someone who is drawing a pension at the same time as accruing further benefits in that same pension plan. It is something that not all employees know when they decide to retire.
Q: I presume that this rule applies to a defined benefit pension plan. What about a defined contribution plan?
A: That’s a good question. So, the rule applies only to a defined benefit pension plan. What that means is, if you draw your pension from your employer’s DB plan you can’t then re-accrue in that same DB plan when you return to work. That doesn’t mean that if you had an accrual in a defined contribution plan that you can’t re-accrue in the same way.
Q: And I presume a Group RRSP would be the same thing.
A: Yes, that’s not covered by the rule either. You could come back and accrue under a Group RRSP subject to any age restrictions in the plan document.
Q: So let’s say a retiree is collecting a DB pension and returns to work. Can that person ask to stop receiving pension benefits so that accruals can start again?
A: The ITA doesn’t weight in on that particular issue, but pension standards legislation across the country does. So, if you are working in British Columbia, the pension benefit standards act in our province specifically requires that the plan text say what happens if a retiree returns to work. If the sponsor of the plan chooses, it can give two options to the retiree who is coming back to work. The first is to continue with the pension and not return as an active member in the pension plan. The second option is to suspend receipt of the pension and return as an active member in that pension plan.
Q: What happens if the employee works beyond the age of 71?
A: Well at age 71 we run into the ITA rules again. So, at the age of 71, you must start receiving a pension if you have been accruing in a pension plan. That’s sort of the end of the line in terms of pension accruals. There has been talk about that number increasing. But as of right now, the rule is, when you reach the age of 71 your pension must start. So even if you’ve come back and you begin to re-accrue you have to be aware of the fact that at some point you’re going to be forced to start receiving that pension and you won’t be able to draw your pension at the same time you are accruing.
Q: What if a retiree takes a job with another employer while collecting a pension from his or her former work place? Can that person start accruing in the new pension plan?
A: Yes, generally speaking, the rule only applies to accruing in and drawing a pension from the same pension plan.
Q: What, if any, alternative arrangements can employers put in place for older employees collecting a pension who are coming back to work?
A: If the employer wants this particular segment of people to return to work and so is motivated to respond to this particular issue, there are options available. The employer could set up a define contribution plan, for example. An RRSP is another way the employer could go, and it’s possible that employer already has that type of arrangement set up for other reasons. However the age 71 restriction applies to RRSPs as well.
Q: How common is it for returning, or older employees to be offered a salary position? Wouldn’t it be more typical for employers to bring on an individual as an independent contractor for a specific period?
A: I think that’s probably true, right now. I wouldn’t be surprised if we see a shift over the next 10 years, given what’s happening demographically in the country, if more companies, are looking to retain or draw back older workers into the work force. It is also less likely in a unionized environment. I think someone who was in a union before retirement will probably go back through the union dispatch program to get work. There are generally fewer options in terms of post-retirement pension accrual after that happens because it’s a union-sponsored plan as opposed to an employer-sponsored plan.
Q: What about age-based restrictions in group benefits plans, like life insurance and health benefits? Are they permissible?
A: They are and that’s certainly something that we see fairly regularly. Sometimes you have to pull the policy document to see exactly what those restrictions are. It’s absolutely common for a health benefit policy to create either a cut-off at a certain age
(usually 65) or a scaled benefit once the covered individual reaches a certain age. For example, it’s very typical to see life insurance coverage drop down even if an individual does work past age 65. And, in health benefits, we see that as well. We often see a cut-off at age 65.
Q: There are several cases alleging that allowing employers to have different benefits for employees over 65 is age discrimination. How have the plaintiffs in these cases fared before the courts? And if they’re not successful, why do you think they’re not?
A: This is certainly the litigation of the day. We’re seeing lots of these types of claims. Just by way of background, there used to be provisions in human rights codes across the country that allowed for mandatory retirement. Employers could force individuals to retire and it wasn’t viewed as being discrimination on the basis of age.
When mandatory retirement was eliminated, what did remain in provincial human rights codes was the provision that says that even though you generally can’t discriminate on the basis of age, that doesn’t apply in the context of a bona fide plan text of a group insurance plan or pension plan. Therefore, unless a former employee can demonstrate to the Human Rights Tribunal, and then on review by the courts that the plan itself is not bona fide, they’re not going to be able to make out an age discrimination claim.
To date, that language has been interpreted to mean that it is essentially a legitimate plan. Tribunals have not gone a step further to say employers must be able to show on an actuarial basis why that age cut-off or that reduction at a certain age is required in order for the plan to be sustainable.
Q: Interesting. With the increasing number of older employees in the workplace, do you anticipate a possible legislative response to better protect the rights of returning retirees to accrue benefits comparable to younger employees?
A: It’s a very strong group, politically. They certainly have leverage. What I do expect to see if tinkering with the age restrictions to recognize that people at age 65 are much more capable than, maybe, they were 50 years ago, and may age 71 is too low an age. But what the drafters/legislators are wrestling with is also the need to transition older workers to make room for younger cohorts.
Q: What, if any, other regulatory issues impacting their compensation package should retirees be aware of if they are considering going back to work?
A: Well, don’t assume that anything that you might have been entitled to when you were in the workforce is a given. Ask specific questions. One thing that could come up depending on the type of employment that the retiree is returning to is, if they’re receiving old age security benefits, there is a the claw back if they earn too high an income. They might have an obligation to re-pay OAS benefits and have those benefits cut-off.
And again, you’d want to get some financial advice to make sure you know exactly what impact the return to work will have on your particular circumstances.
This is all very interesting. Thank you very much for talking to me, Lisa.
Thanks again for having me.
|Written by Sheryl Smolkin|
|Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.|
What’s new on your 2016 tax return: Sale of a principal residenceMarch 23, 2017
By Sheryl Smolkin
For many Canadians, the family home is the most valuable asset they own and an important factor when they are planning their retirement. When you sell your principal residence, any increase in value is not subject to capital gains tax. However, if you sold your principal residence in the last year, there is a new form you will need to complete for the first time when you file your 2016 income tax return.
Your principal residence can be any of the following types of housing units:
- A house
- A cottage
- A condominium
- An apartment in an apartment building
- An apartment in a duplex, or
- A trailer, mobile home, or houseboat.
For one of the above to qualify as a principal residence you must have owned it alone or jointly with another person. In addition, you, your current or former spouse or common-law partner, or any of your children must have lived in the home at some time during the year.
You are only allowed to designate one home as your principal residence for a particular year. If you are unable to designate your home as your principal residence for all the years you owned it, a portion of any gain on sale may be subject to tax as a capital gain. The portion of the gain subject to tax is based on a formula that takes into account the number of years you owned the home and the number of years it was designated as your principal residence.
The principal residence exemption calculation formula is:
The extra year in the top of the equation (the “one-plus rule”) means that when a person moves, both the old home and the new home will be treated as a principal residence in the year of the move, even though only one of them can actually be designated as such for that year. However, for dispositions occurring after October 3, 2016, the “one-plus” factor applies only where the taxpayer is resident in Canada during the year in which they acquire the property.
In years prior to 2016, there was no need to report the sale on your tax return if the entire gain was eliminated. However, on October 3, 2016 the federal government announced that, starting with the 2016 tax year, the sale of a principal residence must be reported on Schedule 3 of the tax return in order to claim the principal residence exemption. This change applies also for deemed dispositions, such as a deemed disposition due to change in use of the property.
The purpose for the new reporting requirement is two-fold. The federal government wants to ensure that Canadian residents only claim the capital gains exemption for principal residences in appropriate circumstances. In addition, under the new rules, foreign buyers who were not residents at the time a home was bought will no longer be able to claim a principal residence exemption.
There are two other major changes to the Income Tax Act (ITA) regarding the reporting of the disposition of a principal residence:
- Canada Revenue Agency (CRA) can, according to new ITA s. 152(4)(b.3), reassess a taxpayer outside of the normal reassessment period, if the taxpayer does not report a disposition. Normally for individuals the reassessment period is three years from the date of the initial notice of assessment, with some exceptions.
- If the disposition of the principal residence is not reported on the tax return as required, a late-filing penalty can be imposed @ $100 per month x the number of months late, to a maximum of $8,000. New ITA s. 220(3.21) is added to this effect.
For a more in depth assessment of how changes to the principal residence exemption may impact you, contact your accountant or other tax advisor.