Federal Department of Finance Seeks New Ways to Tax Dormant Bank Accounts
January 17, 2019
CBC News is reporting this week that the federal Department of Finance wants to tax money that is currently sitting in dormant bank accounts and pension plans and to eliminate any interest that is currently paid on it. The proposal is intended to modestly increase federal revenues.
The “Unclaimed Balances” Regime
This news comes in the wake of a two-year consultation and review period of Canada’s “unclaimed balances” regime. The system has not been changed since its introduction in the 1944.
Under the system, federally regulated banks and trust firms track bank accounts within their organizations. Any money that is found in accounts that have been inactive for a decade and are owned by account holders who cannot be located is turned over to the Bank of Canada.
The Bank of Canada will then hold the money for 30 years if the account balance is under $1000, or for 100 years if the account balance exceeds $1000. Once the money is released by the central bank it goes into the federal government’s general revenues.
As of the end of 2017, the Bank of Canada had collected $742 million in unclaimed funds.
Under the proposed changes, the Department of Finance seeks to:
- Be able to collect funds from dormant accounts that are in U.S. or other foreign currency (which is currently not possible under the existing regime);
- Expand the regime to include funds in unclaimed pensions in active pensions plans (it is currently restricted to terminated plans);
- Once the regime is expanded to include active pensions, be able to deduct tax on the transferred pensions and pay no interest on the balance. The tax would be withheld and remitted to the CRA.
This would be consistent with unclaimed balances regimes in other countries, where no interest is paid on unclaimed funds.
Reportedly, there are more than 500 dormant pension accounts in terminated federally regulated pension plans. In addition, many pension plans that are still active also have dormant accounts. Large corporations have reported that as many as 3% of its pension plan members are owed benefits but cannot be located.
Response from Stakeholders
According to the CBC:
- Sixteen key stakeholders “generally support” the Department’s proposals, and many want to expand the unclaimed pension aspect of the proposal;
- Other stakeholders, including at least one large union have argued that the Bank of Canada should pay interest on unclaimed pension balances;
- At least two stakeholders say that Finance Canada is taking only “baby steps” and that the proposal should include broader assets, such as forgotten bonds (such broader forgotten assets are estimated to be more than $6 billion).
Other countries have divergent ways of addressing unclaimed funds. For instance:
- In the U.K. and Japan unclaimed balances may be invested in projects that support the public good (e.g. public housing) while allowing owners’ to exercise their rights to claim the money;
- In the U.S. “assets-on-hold” are likewise invested in health care and education until the owner seeks to reclaim the funds.
Governments in these countries are also more active about seeking out missing account owners.
We will continue to follow developments in this matter and will provide updates as they become available. In the meantime, if you have questions contact Feigenbaum Law.
With professional accounting designations from both Canada and the US, coupled with being admitted to the bar in the US and Canada, Mark Feigenbaum and his team are uniquely positioned to provide tax advice to clients on both sides of the border. Due to our vast knowledge of both U.S. and Canadian tax systems, professionals in both countries, such as lawyers, accountants, financial planners, agents, and business managers, frequently refer complicated tax matters to our firm. We have developed a reputation for finding creative solutions to seemingly unsolvable problems and for the exceptional quality of our work.