Money in the bank: Ottawa looks for new ways to tax dormant accounts

Millions of dollars owed to ordinary Canadians sits unclaimed in dormant bank accounts and terminated pension plans — and the federal Department of Finance is looking at fresh ways to tax some of that idle money and to reduce or eliminate any interest paid on it.

Proposals to significantly revamp the so-called "unclaimed balances" regime in Canada have undergone more than two years' of consultations and review, and are now in the hands of department bureaucrats.

The goal is to modernize an archaic regime dating from the 1940s. The proposed changes also would save Ottawa money while modestly increasing federal revenues.

Each year, federally regulated banks and trust firms turn over to the Bank of Canada any money they find in accounts that have been inactive for a decade and are owned by people who can't be located.

As of Dec. 31, 2017, the central bank carried $742 million in these unclaimed balances. A central registry allows potential owners to search an online database, and about $10 million in claims are paid out each year.

The system dates from 1944, the year the federal cabinet also set the interest paid on interest-bearing unclaimed accounts at 1.5 per cent — a rate higher than the one currently paid on ordinary bank saving accounts.

The Bank of Canada holds the money for 30 years if the account balance is under $1,000, or for 100 years if it's more than $1,000. After the Bank of Canada releases the unclaimed cash, it goes into Ottawa's general revenues.

Finance Canada wants to cut or eliminate the interest paid on these balances. And small balances — those less than $100, which account for 70 per cent of all unclaimed balances — would be held for an as-yet unspecified period much shorter than 30 years before reverting to general revenues.

And the department wants to add dormant accounts in U.S. dollars and other foreign currencies — now excluded — to the mix.

Unclaimed pensions

Finance Canada also proposes expanding the regime to include unclaimed pension balances. There are more than 500 of these dormant accounts in federally regulated plans that have been terminated.

Many active pension plans also have dormant accounts. Bell Canada, for example, says about 3,000 of its more than 100,000 pension plan members are owed benefits but can't be located.

Dormant pension accounts eventually could be transferred to the Bank of Canada, where they would be included in a searchable online registry that lost owners could check, just as with unclaimed bank accounts.

But Ottawa first wants to deduct income tax on those transferred pensions, and to pay no interest on the balance.

The transfer would "be made on a pre-paid tax basis. That is, income tax would be withheld and remitted to the CRA," says a Finance Canada document outlining its proposals.

Twenty-three stakeholders responded to the department's online consultation on the pension proposals by the deadline — Aug. 21, 2018 — including plan sponsors, a union, actuarial firms, banks and others.

A Finance Canada summary of the submissions, obtained by CBC News under the Access to Information Act, says 16 key stakeholders generally support the proposals.

Indeed, many want to expand the unclaimed-pension proposal — currently restricted to terminated plans — to include active plans in the federal sphere and even provincially regulated plans.

The document suggests, however, that Finance Canada is rejecting any broader move at present: "Consideration may be given to extend framework to ongoing plans later, pending experience and lessons learned from proposed approach."

Five stakeholders, including the major union Unifor, argued the Bank of Canada should pay interest on unclaimed pension balances. But the document says paying no interest is "consistent with unclaimed property regimes in other jurisdictions and would result in lower costs to the Bank of Canada."

A spokesperson for the department, Karianne Laroque, declined to answer CBC News' questions about when the new regime will be unveiled, saying officials are still reviewing the feedback.

At least two of the stakeholders who responded to the consultations say Finance Canada is proposing baby steps when the unclaimed balances regimes should include an estimated $6 billion in broader assets that Canadians appear to have forgotten.

Forgotten bonds

For example, the Bank of Canada says that as of Nov. 30, 2018, about $671 million in matured Canada Savings Bonds have yet to be redeemed — assets not currently included in the online unclaimed balances registry and not part of Finance Canada's latest reform proposals.

The Toronto-based MaRS Centre for Impact Investing says Canada should follow the example of the United Kingdom and Japan, where unclaimed balances can be invested in socially responsible funds that support the public good, such as public housing, while still respecting the owners' rights to eventually claim the money.

Brenda Potter Phelan, an accountant at the firm Silver Compass Inc. in Cambridge, Ont., said Canada is falling far behind the U.S., Australia, New Zealand and Britain in creating legislation to register and manage all kinds of unclaimed property.

Adding up unclaimed tax refunds from the Canada Revenue Agency, unclaimed payments for Canada Child Benefits, unclaimed CPP and EI benefits and unclaimed HST rebates, Phelan estimates that — conservatively — there was almost $6.3 billion in unclaimed money left idle in Canada as of December 2016.

"It's very un-Canadian for us not to help Canadians find unclaimed property balances when nobody loses their money on purpose," she said in an interview. "It's usually the result of an accident, a death. Increased longevity brings forgetfulness."

The United States has a much better system to manage its estimated $75 billion US in unclaimed property, she said. In the U.S., assets-on-hold are invested in health care and education until the owner shows up. Phelan said American governments are also more aggressive in seeking out those missing owners.

"I just don't understand why we are so far behind," she said. "It's a big opportunity."