Proposed Tax Credit Could Extend Pension Coverage To Many Small Business Employees in Canada

By Kekeletso Nkele, small.news Assistant

(small.news) — A proposed tax credit for small employers could help extend pension coverage to millions of Canadians currently saving for retirement on their own, according to a new paper from the CD Howe Institute.

The report estimates that 9.1 million Canadian employees lack access to a workplace retirement plan, including RRSPs and Deferred Profit Sharing Plans (DPSPs).

A significant portion of those workers are employed by small- and mid-sized enterprises (SMEs), where pension offerings remain rare, according to Benefits and Pensions Monitor (BPM).

Pension Gap In SMEs

In 2023, just 37.7% of Canadian employees were enrolled in a Registered Pension Plan (RPP). Coverage varies sharply by sector, with 87.4% participation in the public sector and 20.4% participation in the private sector.

Even when combining group RRSPs and DPSPs, only about 37% of private-sector workers have access to employer-sponsored retirement savings programs.

SMEs account for roughly two-thirds of private-sector employment, yet estimates suggest that only 19% of Canada’s 450,000 SMEs offer a workplace retirement plan, according to BPM.

For comparison, U.S. data from the Center for Retirement Research shows that 53% of private-sector employees have access to a retirement plan, including 401(k)-style defined-contribution arrangements similar to Canadian DC pensions, group RRSPs, and DPSPs.

Why Workplace Plans Matter for Retirement Security

Retirement readiness is shaped by a combination of personal savings and employer-sponsored pensions. Workplace retirement plans offer structural advantages that individual savings accounts typically lack, including:

– Employer matching contributions
– Institutional pricing
– Fiduciary oversight

Without access to a workplace plan, households face greater difficulty maintaining their standard of living in retirement. Canadian research shows that workers without employer-sponsored plans are less likely to save consistently.

According to a Healthcare of Ontario Pension Plan (HOOPP) survey, 53% of Canadians without a workplace plan have less than $5,000 saved for retirement, compared with 35% of workers overall.

From Mandates to Market Incentives

The CD Howe paper examines international approaches, including the United Kingdom’s automatic enrolment system. Under that model, employers are required to enrol employees in qualifying pension schemes, with combined contributions gradually rising to 8% of pay.

Participation in the United Kingdom rose from 40% to 88% following implementation. However, the authors argue that a similar national mandate in Canada would likely face resistance from SMEs due to cost pressures.

Instead of imposing requirements, the paper recommends reducing the real and perceived costs of offering a plan through financial incentives.

How the Small Employer Retirement Plan Tax Credit Would Work

The proposed Small Employer Retirement Plan Tax Credit (SERPTC) directly addresses cost concerns, which HOOPP’s 2024 employer survey identified as the primary reason SMEs do not offer retirement benefits.

The credit would include two main components:

Set-Up Credit

Up to $5,000 per year for three years to cover qualifying start-up expenses, such as:

– Advisor fees
– Plan design
– Employee education
– Payroll integration
– Governance support

Employer Contribution Credit

Up to $1,000 per eligible employee per year for three years, available for employees earning under $150,000.

Under a typical 4% dollar-for-dollar employer match:

– The credit would cover roughly half of the contributions for a $50,000 earner
– About one-quarter of contributions for a $100,000 earner

The credit would be refundable, allowing not-for-profits and early-stage firms to benefit. It would apply to common workplace retirement structures, including pooled registered pension plans and voluntary retirement plans.

Employers with one to 99 employees would qualify if they haven’t offered a workplace plan within the previous three years.

Administration would be handled through the Canada Revenue Agency’s corporate tax system, helping keep implementation costs low. The proposal also includes smaller credits to encourage automatic enrolment features, which remain uncommon in Canada.

What the Proposal Could Deliver

Under a scenario in which each new plan covers 10 contributing employees, with an average of $3,000 in setup claims and full use of the employer credit for three years, the CD Howe paper estimates the program would cost $1 billion to $2 billion over five years.

In return, the authors project that the credit could:

– Add 125,000 to 500,000 Canadians to workplace retirement plans
– Increase the share of SMEs with five to 499 employees offering plans from 18% to between 20% and 28%
– Raise the total number of employers offering retirement plans by roughly 20% to 60%

The authors argue that the policy would primarily benefit workers in smaller firms and lower- to middle-income segments, where retirement coverage gaps remain widest and financial vulnerability in retirement is greatest.