Be Aware of Changes to the Canada Pension Plan
Amendments to the Canada Pension Plan (CPP) were introduced in Bill C-51, the Economic Recovery Act (stimulus). Changes will be implemented gradually over a six-year period beginning in January 2011, with full implementation in 2016.
The main amendments to the CPP can be summarized as follows:
Changes to the Actuarial Factor for Early and Late Retirement
The actuarial factor is the adjustment made to retirement benefits based on whether a person retires before or after age 65. There will be a gradual change in the adjustments for early and late receipt of the CPP retirement pension to restore actuarial fairness. This will further increase the pension for those who start receiving it after age 65, and further reduce it for those who start receiving it before age 65 to ensure there are no unfair advantages or disadvantages to early or late receipt of CPP retirement benefits. The changes in the pension adjustments will be phased in gradually over a number of years, starting in 2011 and will be at their actuarially fair levels by 2016.
Changes if CPP Taken After the Age of 65
Before the changes, CPP retirement pensions increased by 0.5% for each month after age 65 (up to age 70) that contributors delayed receiving them. For example, if contributors started receiving their CPP pensions at the age of 70, their pension amounts were 30% more than if taken at age 65.
From 2011 to 2013, the government will gradually increase this percentage from 0.5% per month (6% per year) to 0.7% per month (8.4% per year). This means that by 2013, if contributors start receiving their CPP pension at the age of 70, their pension amounts will be 42% more than if taken at age 65.
The following table outlines the increase in the monthly actuarial factor for each of the upcoming years:
|Year||% (monthly increase)|
Changes if CPP Taken Before the Age of 65
Before the changes, CPP retirement pensions were reduced by 0.5% for each month before age 65 that contributors began receiving them. For example, if contributors started receiving their CPP pensions at the age of 60, their pension amounts were 30% less than if taken at age 65.
From 2012 to 2016, the amount by which a contributor’s early pension will be reduced will increase from 0.5% per month (6% per year) to 0.6% per month (7.2% per year). This means that by 2016, if contributors start receiving their CPP pensions at the age of 60, their pension amounts will be 36% less than if taken at age 65.
The following table outlines the increase in the monthly actuarial factor for each of the upcoming years:
|Year||% (monthly reduction)|
- Because work interruptions occur for a variety of reasons, including involuntary job losses, and time out of the labour force can lower the amount of one’s CPP allocation, the pension formula is being enhanced to exclude up to eight years (previously it was up to seven years) of low earnings under the general drop-out provision.
- Starting in 2012, contributors can begin receiving their CPP retirement pensions without any work interruption. The elimination of the Work Cessation Test will make it easier for Canadians to make a phased transition to retirement.
- Effective in 2012, if contributors are receiving CPP retirement pensions and they choose to work, they could continue to make CPP contributions that will increase their payments through the Post-Retirement Benefit (PRB). The newly-created PRB will be comprised of contributions made while contributors are receiving their CPP retirement pensions. If they are under age 65, contributions will be mandatory for them and their employers. If they are age 65 to 70, contributions will be voluntary (their employers will have to contribute if they do). People between the ages of 60 and 70 who make these contributions may begin to receive the PRB the following year. Each year of work will provide an additional post-retirement benefit that will begin the following year and will be paid for life. The PRB will be added to an individual’s CPP retirement pension, even if the maximum pension amount is already being received.
The changes to the CPP may affect how and when contributors choose to retire from work and when they decide to apply for a CPP retirement pension. These decisions will depend on individual circumstances such as employment opportunities, other retirement income, health of contributors and their families, and retirement goals.
If you have questions on how the CPP changes will affect your retirement, please contact your local DJB office.
Payments to Family Members – Don’t Get Greedy!
When distributing funds out of a corporation, how to properly income split with family members is a common question among owner/managers looking to save every tax dollar possible. If done properly, this can be effective in reducing a family’s overall tax burden.
Generally speaking, wages are deductible if incurred for the purpose of earning income and are reasonable under the circumstances. This was the issue in a recent case Noel vs. H.M.Q. 2009-2545(IT)(G) where the spouse of a partner in a law firm received a salary of $44,000 for performing bookkeeping services as well as providing various administrative services to the firm. The Canada Revenue Agency (CRA) argued that the salary was not reasonable for a bookkeeper and limited the deductible amount to $200 per week. The Court found in favour of the taxpayer on the basis that the spouse not only performed the bookkeeping services but also was the office manager, as she ran the administrative side of the law practice. As such the salary paid to her of $44,000 was regarded as reasonable.
All cases are fact specific, but overall, where the pay is reasonable when compared to the work being performed, the courts have sided with the taxpayer. A job description of the family member’s duties on the job should be drawn up to help determine what a fair wage is when compared to the market. The implications of the CRA auditing payments to family members can be punitive. If the CRA finds that the deduction is unreasonable, the salary will remain taxable in the hands of the recipient even though the deduction of the salary will be denied creating double taxation!
As long as the payment is reasonable, there is no need to worry about paying your family members from your business. Not only does this help create Registered Retirement Savings Plan (RRSP) room for future contributions and deductions, but it can teach children the value of hard work and how to manage the money they are receiving.
To discuss this and other income splitting techniques, please contact your local DJB office.
Tax Implications for Canadians Owning US Real Estate
Now that you own US real estate, do you have any additional tax filing requirements? That depends on your use of the property. Are you buying the property for strictly personal use or is your venture of a commercial nature such as a rental property?
Where there is no commercial aspect to your property, there are no immediate US tax consequences associated with your US real estate and there is no need for annual US tax filings. The US will tax you on any gain realized on the eventual sale of the property, so a tax return or returns (federal, often state, and occasionally city or county returns) will be required in the year of sale.
Any gain realized on the sale of your US real estate is also taxable in Canada, unless the property is designated as your principal residence. If taxable in Canada, you will be able to claim a credit, against your Canadian taxes, for any income tax that you pay in the US on the gain.
The Canadian tax form T1135 – Foreign Income Verification Statement does not need to be completed as personal-use property is exempt from the reporting requirements.
If you receive any rental revenue from your US property, you should file a US income tax return. This is important, even if you are operating at a loss.
Unlike Canada, depreciation is mandatory in the US, so your annual US tax rental losses are likely much larger than you might expect. Even if you do not file a US tax return to claim the depreciation, your US tax cost will still be ground down by the amount of the annual depreciation, so it is important to file a return and get your losses on record. There may be no immediate US tax benefit associated with reporting your rental losses, but the losses will accumulate and be available as a deduction against your future capital gain in the year of sale. With the exception of deducting the accumulated, unused rental losses, the US will tax the gain realized on the sale of a US rental property in the same way as the gains associated with a personal-use property.
Certain US jurisdictions also impose a sales tax on short-term rentals – for example, Florida imposes a 6% sales tax on lease arrangements of six months or less.
If the property has a Canadian tax cost in excess of $100,000, you should be completing the T1135 to report the foreign asset ownership and the net income generated from the property. A failure to file this form in Canada can result in a penalty of up to $2,500 annually.
Recent legislation passed in the US has increased an individual’s estate tax exemption in 2011 and 2012 to $5 million ($10 million for married couples). This means that as long as the worldwide estate of a Canadian individual owning US assets at the time of death is worth less than 5 million USD, no US federal estate tax will be payable. Since estate tax applies only at death, Canadians who sell their US real estate during their lifetime will not be affected by this tax.
Canadian couples owning US real estate together should hold their property as tenants in common, rather than as joint tenants with the right of survivorship, to avoid having the full value of the property included in the taxable estate of a deceased spouse.
US property ownership can be complex and require planning prior to purchase for Canadians. Please contact your local DJB office prior to closing to discuss how your purchase can be best structured for both US and Canadian tax purposes.
Americans in Canada Face Strict New US Financial Reporting Obligations
As part of a major US tax compliance initiative to ensure proper reporting of income from offshore accounts, US citizens living in the United States or abroad will be required to disclose additional detailed information to the Internal Revenue Service (IRS). This new financial reporting is in addition to the existing Report of Foreign Bank and Financial Accounts (FBAR) that is already required each year to the US Department of Treasury.
If you are a US citizen currently residing in Canada, or you have dual citizenship or a green card, you may have to disclose information about your non-US bank and financial accounts (such as your Canadian investment accounts) to the IRS starting on your 2011 tax return using the new Form 8938. The new rules apply to individuals with specified foreign assets that have a combined value of more than US$50,000 at any time during the calendar year.
For the purposes of these rules, specified foreign asset holdings include non-US bank and investment accounts, such as Canadian Registered Retirement Savings Plans, Registered Education Savings Plans and Tax-Free Savings Accounts, shares in non-US corporations such as Canadian corporations, interests in foreign entities and other types of foreign investments. Failure to report foreign financial assets on Form 8938 can result in a penalty of 10,000 USD (and a penalty up to 50,000 USD for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial underpayment penalty of 40%.
As part of this major compliance initiative, the IRS will also be collecting account information on US individuals directly from non-US financial institutions starting in 2013. To comply properly with these new reporting requirements, non-US financial institutions will have to enter into a special agreement with the IRS by June 30, 2013. Under this agreement, a participating foreign financial institution will be obligated to:
- Undertake certain identification and due diligence procedures with respect to its accountholders;
- Report annually to the IRS on its accountholders who are US persons or foreign entities with substantial US ownership; and
- Withhold and pay over to the IRS 30% of any payments of US source income, as well as gross proceeds from the sale of securities that generate US source income, made to (a) non-participating foreign financial institutions, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a US person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of substantial US owners.
Finally, it is important to note that many details of the new reporting and withholding requirements pertaining to foreign financial institutions must still be developed through the US Department of the Treasury regulations that are expected to be proposed by December 31, 2011.
Year-End Tax Planning Considerations
Tax planning should be a year round exercise, however many of us do not think about income taxes until the year has ended and we are filing our income tax returns. DJB has compiled a list of items to keep in mind that may save you income taxes as long as you take action before the end of the year.
- Consider purchasing depreciable assets before year-end, and hold on to older assets until after year-end to maximize your capital cost allowance claim.
- Consider making needed repairs to business assets and rental properties.
- If a family trust owns the shares of a family business, consider paying a dividend prior to December 31, and allocate the dividend to low income family members 18 years and older.
- Consider paying reasonable salaries to other family members who have little or no income.
- If you still have investments in your portfolio with an unrealized loss, consider realizing the loss to shelter 2011 gains or to carry back to a prior year.
- Consider making your maximum RRSP contribution (see your 2010 assessment notice). If you are turning 71 in 2011, the last day for you to contribute to your own RRSP is December 31, 2011.
- Contribute to a Registered Education Savings Plan (RESP) by the end of the year to receive a Canada Education Savings Grant for 2011.
- Make sure you have your receipts for the following expenses:
- Medical (to ensure you don’t miss any prescription costs ask your pharmacist for a summary of your purchases for 2011)
- New tools if you are an employed tradesperson
- Adoption expenses
- Political and charitable contribution receipts
- Eligible public transit costs
- Tuition and education receipts (Form TL11A is required for foreign tuition fees)
- Eligible child fitness costs and child care expenses
- Eligible child arts costs – NEW FOR 2011
- Eligible moving expenses
- Union or professional dues
If you have any questions about tax planning considerations as year-end approaches, DJB’s professionals can help. Please contact your local DJB accounting and tax advisor for more information.
Closure of PST Audits
Following the July 2010 implementation of the Harmonized Sales Tax (HST) in Ontario, the Ministry of Revenue continued to conduct audits of vendors registered under the former PST system. Representatives from the Ministry have indicated that fieldwork for these audits should be completed by the end of 2011, with March 2012 as the target completion date for any follow up work required from the audit. At that point, the majority of staff transfers from the former PST system to the Canada Revenue Agency should be complete.
If you receive notification of an upcoming PST audit, please notify your local DJB professional as soon as possible to ensure that matters are resolved within this time frame.