Skip to Content

More flex for pension plans

A reasonably permissive borrowing regime should remove the liabilities test and place limits instead.

No more borrowing

The Pension and Benefits Law Section of the Canadian Bar Association is in favour of a reasonably permissive borrowing regime for pension plans under paragraph 8502(i) of the Income Tax Regulations, or ITR. It comments on draft changes to the regulations in a letter to Finance Canada.

“We commend Finance Canada’s efforts to make the borrowing rules more flexible for defined benefit, or DB, plans,” the letter states. This flexibility is gives plans better tools to invest assets and manage risks properly.

There are two aspects of the proposed new rules, however, that the Section believes undermine the stated objectives and could impose unnecessary burdens. The first one is that the “funded status of a plan is not well correlated with whether it would be appropriate or helpful for a plan to borrow to meet investment or liquidity objectives.” The second has to do with the removal of the 90-day borrowing rule exception “in conjunction with adding the liabilities test makes the new borrowing rule less flexible for DB plans near or at a 125% funded status.”

The Section recommends removing the liabilities test and relying on the 20% of net assets limit on borrowing. This “best aligns with Finance Canada’s stated objectives, without undermining any desire to cap the accumulation of surplus in a pension plan.”

Or Finance Canada could retain a version of that test and replace the “sliding scale” test that decreases the amount a plan can borrow as it approaches 125% funding “and replace it with a hard limit when a plan becomes 125% funded, not before.” The Section says this approach would give plans better certainty and decrease the risk of unintended consequences.

Either way, the letter adds, “we believe it would also be helpful to include the current 90-day borrowing rule exception in any new rule. This would ensure plans avoid inadvertently exceeding (including in some cases due to events beyond their control) either an asset based or liabilities-based limit.”