September 2019
Municipal pension plan accounting – withdrawal of a tax relief measure
Quebec’s Ministère des Affaires municipales et de l’Habitation (MAMH) recently announced the withdrawal of a tax relief measure* for the past service costs related to pension plan enhancements. This directive will come into effect as of the 2020 fiscal year.
Canadian public sector accounting standards require the cost of pension plan enhancements to be recognized in the fiscal year when it is incurred. Until now, the MAMH has allowed organizations to spread the tax impact over several years by recording the cost under “Amount to be taxed or funded in the future” (often referred to by the French acronym “DCTP”). This amortization period can last as long as the Expected Average Remaining Service Lifetime (EARSL). Starting with the 2020 fiscal year, this measure can no longer be used for new enhancements.
The MAMH recommends that municipal organizations that have applied this measure but have not yet fully amortized the DCTP balance should amortize the remaining balance as soon as possible. Note that a municipal organization may have a DCTP balance that is not related to the cost of an enhancement, such as a balance related to an initial deficit or the 2008 financial crisis. The withdrawal of this measure will not affect such balances.
Since most pension plans have constructive obligations, the tax impact should be low or non-existent if an enhancement is funded by a statutory or restructuring reserve or by the stabilization fund. In the event that an enhancement calls for an immediate special contribution, there are alternative solutions for spreading out the tax impact, such as the use of long-term debt financing.