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Normandin Beaudry

Tax relief measures for municipal sector defined-benefit pension plans

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There, in black and white

NB Bulletin Vol. 12 N. 12, October 2009

Municipal edition

In the wake of various consultations with the municipal sector, the Ministère des Affaires municipales, des Régions et de l'Occupation du territoire (MAMROT) published an information document on October 7 concerning the supervision and follow-up of the tax relief measure for municipal sector defined-benefit pension plans. Initially introduced during the 2009 budget preparations for municipal organizations, this tax relief measure was intended to mitigate the effects of the 2008 economic crisis on the 2009 tax burden. This new MAMROT document specifies its future application.

The tax relief measure (corridor method)

As a result of the tax relief measure, a municipal organization may reduce the impact of 2008 losses on accounting expenses within a corridor representing 10% of the value of the liability or asset at the beginning of 2009, whichever is higher. This impact, which is the result of the amortization and interest on losses within the corridor, is instead assigned annually to future provisions specifically set up for the tax relief measure.

Supervision and follow-up of the tax relief measure

The corridor method is based on the principle that reversal of future provisions will be implemented in due course on the basis of subsequent years' gains. However, MAMROT is concerned that the level of gains that may be realized in future years would not be enough to compensate for 2008 losses within a reasonable timeframe, which could result in an unwarranted intergenerational transfer.

Thus, to reduce this risk, use of the corridor method for financial years after 2009 must meet the two following criteria:

  • Future provisions accumulating as a result of annual use of the tax relief measure must be fully reversed at the end of the expected average remaining service life (EARSL) as at December 31, 2008.
  • At no time may the cumulative future provision exceed 7% of the existing assets or liability at the start of the financial year, whichever is higher.


Several strategies exist to adequately plan future provision reversals. MAMROT suggests preparing financial projections for the EARSL as of now in order to plan the future provision in view of the tax relief measure and its subsequent reversal.

Importance of understanding and taking action

As a result of this announcement, each municipal organization must decide how it will make use of the tax latitude made available by this measure. In performing this exercise, the overall impact of tax relief measures provided by MAMROT-including other employee future benefits -should be considered.

Decisions resulting directly from application of these concepts will have substantial financial impacts for municipal organizations in future years. Full use of the tax relief measure in future financial years could result in substantial increases in the tax burden on retirement plans in the event of weak actuarial gains during this period.

It is important that every municipal organization make an effort to understand these new concepts. To this end, the Normandin Beaudry consultants have developed a half-day training session that was presented on October 8 as part of the training program of the Corporation des Officiers Municipaux Agréés du Québec (COMAQ).

 

Please feel free to contact us for additional information.

514.285.1122
 
630, René-Lévesque Blvd. West, 30th floor
Montreal, Quebec, H3B 1S6