Proposed tax credit could help millions of workers at small firms save for retirement
A C.D. Howe report recommends a federal tax credit to help small employers set up and contribute to workplace retirement plans, aiming to close a coverage gap affecting millions of Canadians.
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By Torontoer Staff
More than nine million working Canadians lack access to a workplace retirement plan, largely because small and mid-sized employers rarely offer them, a new C.D. Howe Institute report finds. The think tank proposes a targeted federal tax credit to help small employers cover set-up costs and early employer contributions, modeled on U.S. incentives.
The report highlights a notable coverage gap: only 37 per cent of private-sector employees participate in a workplace retirement plan in Canada, compared with 53 per cent in the United States. Fewer than 19 per cent of Canadian employers with five to 499 staff offer a plan, while nearly half of similar U.S. firms do.
Why the gap matters for workers
Workers without employer plans typically save on their own, which tends to produce lower and more inconsistent contributions. Employer-sponsored plans automate saving, reduce fees through scale and limit the impact of behavioural biases, the report says. Those differences leave many employees less prepared for retirement.
When people save for retirement independently, contributions tend to be inconsistent, more expensive and shaped by behavioural biases, compared with employer-sponsored plans that automate saving and benefit from lower fees.
Keith Ambachtsheer, co-author, C.D. Howe Institute
What the proposed tax credit would do
The Canadian proposal has two parts: a set-up credit and an employer contribution credit. The set-up credit would cover qualifying plan start-up costs, up to $5,000 per year. The employer contribution credit would cover up to $1,000 per eligible employee for employer contributions to a newly offered plan, for workers earning less than $150,000. Employers could claim both credits for up to three years.
- Eligible businesses: one to 99 employees, aligning with Statistics Canada's small business definition
- Set-up credit: up to $5,000 a year for qualifying start-up costs
- Employer contribution credit: up to $1,000 per eligible employee for workers earning under $150,000
- Duration: credits claimable for up to three years
The authors estimate the package would nearly halve the cost of offering a retirement plan for a typical small employer during the initial three years. Over five years, the program could extend coverage to an estimated 125,000 to 500,000 additional workers at a projected federal cost of $1-billion to $2-billion.
Why small employers do not offer plans
Cost is the most commonly cited barrier. Many small-business owners perceive retirement plans as complicated or expensive, even when fintech and pooled-plan options can simplify administration and lower fees. A 2024 HOOPP survey of more than 750 employers listed cost as the top reason for not offering retirement benefits.
They often have a perception that it’s more complicated or more costly than it is. The proposal tries to take the things about the U.S. program that have worked well and then improve on them and adapt them to the Canadian environment.
Alex Mazer, co-author, C.D. Howe Institute and CEO of Common Wealth
Lessons from the United States
C.D. Howe draws on U.S. changes under the 2019 SECURE Act and SECURE Act 2.0. Those laws expanded tax incentives for small employers, and between 2018 and 2023 roughly 150,000 new 401(k) plans were created in the U.S., with nearly two-thirds launched between 2021 and 2023. Canadian authors say the proposed credit adapts those lessons to local needs and includes not-for-profits and early-stage startups that are not yet profitable.
Potential effects for employees and employers
Beyond retirement readiness, workplace pensions can help employers recruit and retain staff. A 2025 HEC Montréal study found private-sector workers in Canada would accept about a 6.3-per-cent reduction in pay for a job with a pension plan, suggesting employer-sponsored savings are a tangible benefit when labour markets tighten.
For small employers, the credits would lower initial set-up hurdles and subsidize early contributions, making it easier to introduce plans with automatic employee enrolment and lower fees. For employees, that could mean steadier saving and improved retirement outcomes compared with relying entirely on personal savings vehicles.
What comes next
The C.D. Howe proposal now joins broader policy discussions about retirement security in Canada. Implementing a federal tax credit would require parliamentary approval and budget allocations. If adopted, the design details, eligibility rules and reporting requirements will shape uptake among small employers.
For employees at small firms, the immediate takeaway is pragmatic: ask whether your employer has evaluated pooled-plan options, and if your workplace lacks a plan, consider starting a conversation about the costs and benefits. For small-business owners, the proposed credits could reduce financial and administrative barriers to offering a benefit that supports worker retention and retirement readiness.
The C.D. Howe report suggests a targeted federal tax credit would be a cost-effective way to increase coverage, but the proposal’s impact will depend on policy choices, outreach to small employers and the ease of onboarding plans in practice.
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