1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

Mergers and Acquisitions in Canada

Generally, there are two types of pension plans:

  1. 1.     a defined benefit plan (“DB plan”); and
  1. 2.     a defined contribution plan (also known as a money purchase plan) (“DC plan”).

A DB or DC plan can be either “contributory” (i.e. member contributions are required) or “non-contributory” (i.e. member contributions are either prohibited or voluntary). Some employers have “hybrid” DB/DC plans.

In a DB plan, the pension payable to a member is determined according to a pre-determined formula. There are many types of formulae that could be used, including final average earnings, career average earnings and flat benefit. For example, in a final average earnings plan, the employee might be entitled to an annual pension equal to one per cent of the average of his or her earnings in the last five years of his or her employment, multiplied by his or her total years of pensionable service, subject to the Act’s maximum annual pension benefit limit. The employer’s required contributions to the DB plan will vary depending on the actuarial methods and assumptions used to determine the required funding level, in order to provide the promised benefit and the actual investment returns on contributions made. Employers are basically obligated to ensure that the pension plan has sufficient assets to meet its promises. Given the nature of DB plans, the pension plan may contain a surplus or deficit.

In a DC plan, the contribution amount is fixed and is subject to contribution limits under the Act. For example, the employer contribution amount might be five per cent of the member’s earnings, subject to the contribution limit in the Act. Upon death, termination of employment or retirement, the plan member (or spouse/beneficiary of the member, as applicable) is entitled to the accumulated contributions plus investment earnings thereon in the member’s DC plan account.

Typically, the employees are provided with an array of investment funds, selected by the employer, from which they select their investment choices for their DC plan account. If the member is alive upon termination of employment or attainment of the relevant retirement age, the accumulated funds can be used to purchase an annuity for the member or transferred to other locked-in retirement vehicles. The value of an individual’s retirement income under a DC plan is solely dependent upon the level of investment income that is accumulated on the fixed contributions. This is in contrast to a DB plan which provides a promised level of retirement income. As a result, a DC plan is considered to be riskier for an employee than a DB plan.

In Canada, only the federal jurisdiction has “safe harbour” provisions for the selection of the investment line-up for member assets in DC plans. No other Canadian pension legislation has any “safe harbour” provisions. In 2003, an association of Canadian regulators called the Joint Forum of Financial Market Regulators (which has representatives from Canadian pension, securities and insurance regulators) issued “Guidelines for Capital Accumulation Plans.” These guidelines suggest best practices by employers and service providers, so that capital accumulation plan (“CAP”) members will have the information and assistance they require to make appropriate investment decisions. A DC plan is considered to be a CAP.

Both DB and DC plans require, under law, an administrator to undertake the administration of the pension plan. Administrators have a statutory fiduciary duty to the members of the pension plan. Given the potential liability related to this duty, although some pension plans are overseen by a board of trustees, employers are typically forced to adopt this role for lack of an alternative administrator. Therefore this duty will often conflict with the duties of the directors and officers of the employer to the owners or shareholders of the employer. In order to mitigate liability for this conflict, often termed the two hats conflict, employers who act as administrators should consider establishing a comprehensive and transparent governance structure.

DC plans should not be confused with group registered retirement savings plans (“RRSP”). A group RRSP is a collection of individual RRSPs. An RRSP is a tax-deferred vehicle issued under the Act, which allows individuals to deduct from taxable income, the amounts contributed to their plan, up to certain contribution limits. Employers who wish to supplement employee contributions will gross-up employees’ wages with the understanding that the grossed-up amounts are contributed to the employee’s RRSP. The earnings on those amounts are not subject to tax while they are held within the RRSP. In general, all amounts received from an RRSP are included in the individual’s income.

RRSPs are governed under the Act but are not subject to pension legislation. The CAP guidelines, referred to above, apply to RRSPs as well. Although a group RRSP may be structured like a DC plan (e.g. fixed contributions based on a percentage of earnings), they are two entirely different retirement arrangements. For example, funds held within a group RRSP are not required to be “locked-in” (i.e. they can only be used to provide periodic payments upon retirement). Thus, unlike DC plan funds which must be locked-in under pension laws, group RRSP funds can be commuted and withdrawn in cash by employees prior to retirement. From the point of view of a corporate transaction, if the target company has a group RRSP rather than a registered pension plan, the issues to be addressed are much less daunting.

Additional posts from the blog



New Bill Heightens Potential for More Investment Canada Reviews of SOE Acquisitions

by Sandra Walker

Last week the Canadian Government introduced amendments to the Investment Canada Act (ICA) to implement its revised policy towards state-owned enterprises (SOEs) which it announced in December last year. At that time, while it approved the acquisition by Chinese SOE, CNOOC, of Canadian oil and gas company, Nexen, the Government announced its intention to prohibit acquisitions of control of Canadian oil sands businesses by SOEs except on an exceptional basis. It also stated that joint ventures and minority investments were welcome. In addition, the government indicated it would closely monitor SOE acquisitions in other sectors of the economy and would distinguish between SOE and non-SOE investments when setting the ICA review threshold. (See Focus on Foreign Investment Review, December 2012)



The Autorité des marchés financiers Proposes An Alternative Approach to Securities Regulators Intervention in Defensive Tactics

by Guy Paul Allard

On March 14, 2013, the Autorité des marchés financiers (“AMF”) published for comments a consultation paper (the “AMF Proposal”) pertaining to defensive tactics in response to take-over bids. This consultation is taking place concurrently with the one launched the same day by the Canadian Securities Administrator (“CSA”) with the release of proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). Unlike the CSA’s 62-105, the AMF Proposal addresses all defensive tacticsii, not only security holders rights plans.



Proposed New Framework for Rights Plans a Potential Game Changer for Hostile Bids

by Daniel Katzin

The Canadian Securities Administrators published for comment a proposed new regulatory framework for rights plans under proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). If adopted, 62-105 would provide issuers with a game changing tool to respond to hostile take-over bids, where a target board will be able to use a rights plan as leverage to negotiate with a potential bidder.

Privacy Policy | Terms of Use

© 2018 Dentons