Imagine a world where millions of employees enjoy the security of retirement plans, yet more than nine million working Canadians are currently without such a safety net. This challenge largely stems from the fact that small and medium-sized businesses are far less likely to provide workplace retirement options compared to their larger counterparts. A recent report from the C.D. Howe Institute sheds light on this pressing issue and suggests a potential solution in the form of a targeted federal tax credit, akin to successful programs implemented in the United States.
According to the report released on Tuesday, only about 19% of small and mid-sized employers—those with anywhere from five to 499 employees—offer a workplace retirement plan. In stark contrast, nearly half of similar employers in the U.S. provide such benefits. This discrepancy has significant implications for the workforce, as approximately two-thirds of private-sector employees in Canada work for small and medium-sized enterprises, as per data from Innovation, Science and Economic Development Canada. Alarmingly, just 37% of Canadian private-sector employees have access to a workplace retirement plan, whereas the figure stands at 53% in the United States.
Keith Ambachtsheer, one of the report's co-authors and director emeritus at the International Centre for Pension Management at the University of Toronto’s Rotman School of Management, emphasizes that individuals without access to employer-sponsored retirement plans are generally less prepared for retirement. When people attempt to save for retirement on their own, they often face challenges like inconsistent contributions, higher costs, and biases that can hinder their saving efforts. In contrast, employer-sponsored plans facilitate automatic savings and typically feature lower fees, making them a more reliable option. As life expectancy increases and living costs rise, relying solely on personal savings becomes increasingly difficult.
The primary barrier preventing small employers from offering retirement plans is cost, according to Alex Mazer, co-author of the C.D. Howe report and CEO of Common Wealth, a fintech firm specializing in group retirement solutions. He notes that many small business owners perceive the process as more complicated or expensive than it actually is. A 2024 survey conducted by the Healthcare of Ontario Pension Plan among over 750 employers confirmed that cost is the leading reason cited for not providing retirement benefits.
The proposed Canadian tax credit outlined in the C.D. Howe report comprises two components: a setup credit and an employer contribution credit. The setup credit would reimburse qualifying startup costs associated with establishing a retirement plan, up to $5,000 annually. Meanwhile, the employer contribution credit would offer up to $1,000 for each eligible employee's contributions to the newly established plan, applicable to employees earning less than $150,000. Both credits could be claimed by businesses for a maximum of three years.
Eligible businesses must have between one and 99 employees, aligning with Statistics Canada’s definition of a small business. The report's authors estimate that the implementation of this tax credit could reduce the cost of providing a retirement plan by nearly 50% for an average small employer within the first three years. Over a five-year span, this initiative could extend retirement plan coverage to between 125,000 and 500,000 additional workers, with an estimated financial impact of $1 billion to $2 billion during that time frame.
Beyond simply enhancing retirement savings, workplace pension plans have emerged as vital tools for attracting and retaining talent. In fact, a 2025 study by HEC Montreal revealed that private-sector workers in Canada would be willing to accept a pay cut of 6.3% in exchange for employment that includes a pension plan.
The C.D. Howe proposal takes cues from recent legislative changes in the U.S., particularly the expanded tax incentives for small employers introduced under the SECURE Act in 2019 and its 2022 follow-up, which allow eligible U.S. employers to claim similar tax credits. Between 2018 and 2023, around 150,000 new 401(k) plans were established, with a significant portion launched in the last two years, demonstrating the effectiveness of these incentives.
Mr. Mazer highlights that while the Canadian approach draws inspiration from the U.S. model, it also seeks to refine and adapt those successful elements to better fit the Canadian context. Notably, the proposal would also be available to nonprofit organizations that do not currently offer retirement plans, as well as to startups that may not yet be operating profitably.
But here’s where it gets controversial: could such a tax credit truly change the landscape of retirement planning for Canadians? Would small businesses embrace this support, or would lingering misconceptions about the complexity and costs hold them back? Let us know your thoughts in the comments below!
