TFSA for a Sick-Day – A Benefit to Bank On

A possible middle ground for a city overrun by growing deficits and growing piles of garbage

The current strike by Toronto’s inside and outside workers has brought to light a large liability for a benefit that has been on the books of the City for decades but never paid for – the employee sick day bank.

Though currently the most high profile case, Toronto’s unionized employees are not alone in having a sick-day bank available to them. Workers in other municipalities, government agencies and some areas of business have similar promised benefits. However, nearly all operate in the same sub-optimal way as the Toronto plan has.

It has been noted in the different press articles that the unfunded liability on the books for current employees in the city of Toronto alone was as low as $140 million to as high as $260 million depending on what employees are counted (still others have pegged it at $250 million).


The sick day bank provisions were introduced several decades ago to help combat absenteeism and to reward employees who do not use all their designated days in a given year. At the time, such an arrangement was beneficial to both parties - healthy and loyal employees received an added monetary benefit, and employers decreased their immediate labour costs (as these benefits would likely have been negotiated in lieu of higher pay). Back to the present however, and with the impending retirement of the baby-boom generation, the proverbial chickens have come home to roost for cash strapped employers who now need to pay for these benefits. And to make matters worse, unlike an employee pension plan, there is no pot of money set aside to pay for benefits as they come due.

Some may question the foresight and planning involved on this issue by both sides of the current controversy, but finger pointing will not solve the issues faced today. Another important factor to consider, which to date has not been mentioned, is the tax policy of the Canada Revenue Agency, as tax legislation does not provide any incentive to pre-fund the sick-day benefit or most other health related liabilities. A sick-day bank can be thought of as an early retirement benefit, but unlike similar early retirement benefits inside a pension plan, the City (or plan sponsor) is not able to pre-fund the benefit over a worker's career on a tax deferred basis.

Is there a possible way forward?

Neither side of the current argument is willing to give-in, because to this point, it has been an all-or-none proposition. The City states that it simply cannot afford the benefit, the unions state that the benefit has been negotiated, in good faith, over many collective bargaining agreements and will never freely give up the benefit.

Although this is not the first time that employer and employee unions have clashed over this issue, there may be a new tool available today that was not available in the past, which is the Tax Free Savings Account (TFSA).

A tax free savings account, which came into effect in 2009 is a way for individuals or groups of individuals, to set-aside after tax cash today and let it grow tax free over the short, or long-term. There is a $5000 limit to contributions in a given year, but investment growth (capital gains, interest) inside the structure is not taxed and account holders can withdraw assets at anytime.

The present value of a sick-day like benefits earned each year could be paid into a TFSA held in the employee’s name. There are many organizations in Canada (insurance companies, banks) that have built the infrastructure to administer such a program on a large-scale and cost effective basis. The City would win by being able to budget and set aside cash for benefits as they are earned and members would win by retaining a valuable benefit, which would be secured with real assets, rather than a promise to pay in the distant future from a cash strapped city.

Things can get a little trickier when trying to pay for benefits already earned by employees or when a employee needs more than 18 sick days in a subsequent year. However, a plan could be structured to handle this through a combination of “pay-as-you-go” benefits and some amortization of past benefit costs into the TFSA, up to certain limits, over a specified time period.

Tax Free Savings Accounts could have other added benefits for employees for tax planning and estate issues, as Ontarians are able to designate beneficiaries for their Tax-Free Savings accounts. This would allow a TFSA owner’s assets to flow to their beneficiaries at the time of death. Account holders would control both the investments they hold in the account and would gain more access to assets that they currently enjoy.

The time is right to move forward in a new direction and we think a TFSA structure could allow both sides to come out ahead. A successful implementation in Toronto could offer a model for other jurisdictions and would not require new government legislation to be passed.