Impending Changes To CPP

In 2018, many owner-managers across Canada chose to adjust staff levels, wages, and prices when the minimum wage was increased. For many, it is still too early to determine the final impact on the corporate bottom line as a full fiscal year has not been completed.

With the adjustments of 2018, owner-managers may not have looked at budgets for 2019, but considering changes in the Canada Pension Plan (CPP), it may be time to start projecting 2019 and beyond.

BILL C-26

On October 6, 2016, Bill C-26 was passed with the objective of enhancing the CPP to increase the amount working Canadians receive from CPP when they retire. The amount is set to increase from one-quarter of their eligible earnings to one-third.

The increase to an individual’s pension will depend on how long and how much they have contributed to the enhanced CPP structure. An individual will receive the full increase if they have contributed to the enhanced CPP for 40 years. Further, the federal working income tax benefit (WITB) will increase to offset the increase in CPP contributions from low-income earners.

This is a polite way of saying that starting January 1, 2019, higher contributions will be required from both employees and employers. Higher contributions will be phased in over seven years.

The new structure requires that employees and employers contribute more on earnings up to the maximum amount of eligible earnings as indicated under the CPP contribution tables. By 2023, the employee and employer CPP contribution rate will have risen from 4.95 percent to 5.95 percent of eligible earnings. This increase will be phased in gradually from 2019 to 2023.

Those who are self-employed pay both sides of the equation, so contributions will have risen by 2% of eligible earnings by 2023.

MAXIMUM PENSIONABLE EARNINGS INCREASING

Under the current system, CPP contributions are capped at 4.95% of the maximum annual pensionable earnings of $55,900. Once the $3,500 basic exemption is applied, the maximum contribution by both employee and employer is $2,593.80 for a total contribution of $5,187.60.

Down the road, the Yearly Maximum Pensionable Earnings (YMPE) figures are going to change starting from the 2018 YMPE maximum to a projected YMPE of $72,500 by 2025. This amounts to an increase in the YMPE approximating 30%.

In addition to establishing a graduated YMPE rate for contributions, there will be a new upper earnings limit starting in 2024 called the Year’s Additional Maximum Pensionable Earnings (YAMPE) that will effectively require both the employee and the employer to pay an additional amount into CPP when they exceed the YMPE. It appears that an additional 4% contribution will be required by both the employee and the employer on any amounts that exceed the $72,500 YMPE amount up to the YAMPE of $82,700.

TAX DEDUCTION FOR ENHANCED CPP CONTRIBUTION

For the employed and self-employed that exceed the $72,500 YMPE and are required to pay an additional amount to CPP, the employed will be entitled to a tax deduction on the excess amount, while the self-employed will be able to deduct both the employee and employer share of enhanced contribution.

MANAGE THE FUTURE

Even though these increases will be phased in over time, astute owner-managers must consider:

the future cost of payroll and the impact on profits
the impact that these changes may have on the company retirement and savings plans already
in place for employees
whether future hires will be entitled to the same benefits package as existing employees
ensuring that those preparing payrolls are aware of the impending changes
preparing your employees for the additional deductions by communicating to employees the projected additional CPP source deductions from their pay
communicating to the employee the additional benefit cost for contributions the company makes
to their CPP
communicating to employees the impact that additional contributions may or may not have on the company retirement and savings plan
the impact that this may have on future payroll costs as employees request raises to offset the additional deductions from payroll and an increase in the cost of living
the timing of bonuses and other discretionary income

Employers and those who are involved in payroll may be interested in reviewing the CRA website that offers a chart showing the timing of the changes, the increased YMPE, the additional contribution amounts that will be required up to the YMPE and the contributions required on amounts over the YMPE.

Those who are involved with payroll will certainly want to keep abreast of the changes and ensure that their accounting packages can be modified for the changes that are coming.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

TFSA and Death: Have You Planned For What Will Happen With Yours When You Die?

If you own a TFSA, you undoubtedly started it because it allows you to invest and earn dividend or interest income and make a capital gain without paying tax.

Unfortunately, similar to any investment vehicle, complications may arise after your death unless you address the tax consequences in advance. Consider the following circumstances that can affect what happens with your TFSA after you die.

SUCCESSOR HOLDER

If you have named a survivor — your spouse or common-law partner — as a successor holder, then that individual acquires all the rights of the original holder and thus becomes the new account holder.

With this scenario, the TFSA does not terminate and thus there are no tax consequences to the new account holder. An additional benefit may accrue if the original holder has overcontributed before they passed and the new account holder has contribution room in their TFSA.

In this situation, the overcontribution by the deceased can be absorbed by the new account holder into their TFSA, thereby eliminating the chance of future overcontribution penalties (currently at 1% per month).

ROLLOVER PERIOD

Assume for a moment that the deceased did not designate the spouse or the common-law partner as a successor holder. What then?

If the spouse or common-law partner named in a will are accorded an inheritance that includes the TFSA, they can transfer their spouse’s TFSA to their own TFSA within a prescribed time period, called the “rollover period.”

The rollover timeframe is explained as starting at the time of death until December 31 of the following year. During this rollover period the investment income is sheltered from income tax.

If the beneficiary decides to transfer funds to their own TFSA during the rollover period, these transfers are considered to be “exempt contributions” and as such do not require that the beneficiary have room in their own TFSA. However, the amount of the transfer is limited to the fair market value (FMV) of the TFSA as at the original holder’s time of death.

Thus, if at the time of death, the FMV was $50,000 but at the time of transfer the value of the TFSA was $55,000, then the $50,000 could be transferred without any impact.

However, the $5,000 increase would either have to be absorbed by the beneficiary if they have room within their TFSA or be included within the beneficiary’s income within the year of the transfer.

NAMED BENEFICIARY

When you die without a spouse or common-law partner, the TFSA is collapsed at the date of your death. The amount of the TFSA can be transferred to the named beneficiary tax-free, but only up to the amount of the FMV of the TFSA at the date of death. Naturally, the beneficiary would need to have TFSA room to absorb the FMV transfer.

For instance, if the beneficiary had $30,000 of accumulated TFSA room and the FMV of the transfer was $55,000, $30,000 would be transferred tax-free while the excess $25,000 would be considered withdrawn and part of the beneficiaries inheritance with no additional Canadian tax consequences.

This calculation does not account for any increase in FMV that may have occurred since the date of death.

FORM RC 240

It is worth noting that when a contribution is made to the successor holder’s TFSA, the successor holder has 30 days from the date of contribution to fill in Form RC 240, Designation of an Exempt Contribution Tax-free Savings Account (TFSA).

As you can see, there are potential tax complications with a TFSA when a taxpayer passes. Remember also that the provinces and territories are responsible for the rules governing the transfer of assets of a deceased.

Fortunately, the CRA and their provincial/territorial counterparts have agreed that having the named beneficiary on the TFSA application will allow transfers without inter-jurisdictional complications.

Quebec may be an exception, wherein the TFSA transfer goes to the estate and the will of the deceased comes into play.

Since TFSAs are registered with the CRA, an astute taxpayer would want to determine the tax consequences, either when their TFSA has a named survivor or when the will takes precedent.

It’s probably worthwhile to confirm that your CPA is aware that you have a TFSA. Then, should you die unexpectedly, your tax advisor can assist your successor holders or beneficiaries.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

OUCH—We Owe How Much?

Manage Cash Flow Better By Projecting Future Tax LIabilities

Unforeseen circumstances often leave owner-managers short of the cash needed to pay federal and provincial taxes. Unfortunately, many owner-managers consider unpaid tax bills to be the same as unpaid trade credit.

They are not.

Unpaid taxes can cause a lot of problems. Ensuring funds are available to pay obligations to the Canada Revenue Agency (CRA) should be a top priority for any business, whether incorporated or a sole proprietorship.

WITHHOLDING TAXES

Every self-employed business owner or owner-manager is obligated to collect GST/HST and PST as well as deductions for employment insurance, Canada Pension Plan, and income taxes. These amounts are collected “in trust” from the employee or client on the understanding that the funds will be remitted to the CRA on their behalf.

In theory, the business should just collect the money and set it aside in a separate account until the required filing date. However, it is often all too tempting to use the “in trust” funds as working capital and assume sufficient cash flow will be generated when accounts receivable are collected or additional cash sales occur.

This may be fine in theory, but in practice, the necessary funds are rarely available. For a corporation, it is particularly important to note that directors could be held personally liable for the unpaid “in trust” taxes.

INCOME TAX PAYABLE

Income tax payable at the end of the year, whether for corporate tax or income tax owing on self-employed earnings, is another area that is problematic for many. The major issue for most businesses is that they are unable to project the amount of taxable income that will be earned by year-end and thus cannot anticipate the amount of income tax owed.

As a result, when taxes are due, there may be insufficient funds available to make the payment.

To make matters worse, many corporations are required to pay the taxes owing within two or three months of the corporate year-end. Owner-managed businesses may have difficulty finalizing their year ends and providing such information to their CPA on time. Thus, year-end taxes and the instalment could be owing at practically the same time. This creates incredible cash flow issues for corporations that have a large corporate tax liability at the end of the fiscal year and then have to make a large instalment payment.

The reverse can also occur. A taxpayer remits large amounts in instalment payments throughout the year based on the prior year’s tax liability only to discover at the end of the current fiscal year that the corporation made little profit or suffered a loss and therefore owed much less than the sum of the instalment payments already made. In such instances, the CRA may owe the business thousands of dollars that could have been used within the business but are not refunded until the actual filing of the tax returns.

THE CRA HOLDS ALL THE CARDS

The CRA determines when taxes should be paid. If instalment payments are not paid, the business must endure non-deductible interest for late payment. On the other hand, if the instalment payments are made and the business does not have a tax liability, the CRA has held onto funds that could have alleviated cash flow.

The CRA pays interest on overpayments, but only on the amount of tax owing at the time of filing, not on the entire amount of the overpayments. Also, the CRA charges the taxpayer’s arrears interest at 6% while the interest rate on taxpayer’s overpayments is only calculated at 2%.

Business Owners Need Money On Hand To Pay Tax Instalments

TAKE CHARGE

Business owners need to have sufficient funds on hand to make payments when due. To minimize the risk of insufficient funds, management must take into account not only the withholding tax requirement but also the need to minimize instalment payments and/or interest charges on the funds needed to make the corporate tax instalments.

The following procedures provide a way to anticipate future obligations. The process of deriving this information will be of value to your business by:

Ensuring a better understanding of your business cycle
Providing insight into periodic profits and losses and thus any potential income tax liability
Projecting the estimated GST/HST/ITCs and withholding taxes that will be due
Providing indicators of when cash flow may be tight
Reducing the uncertainly as to the amount of income tax instalments and thereby providing a reasonable payment schedule for corporate income tax
Lessening the impact of non-deductible interest and/or penalties on amounts due but unpayable because of inadequate cash flow
Reducing the probability of scrutiny by the CRA because of late payments

THE PRESENT GUIDES THE FUTURE

If management makes reviewing financial statements an integral part of their work cycle, not only will they benefit the future by understanding the present, they will also be better able to sleep at night knowing their cash flow needs are under control.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or any consequences arising from its use.

Corporate Year-End

Before choosing a date for your year-end, think about the date that works best for your kind of business.

When entrepreneurs incorporate their businesses under their respective provincial articles of incorporation, often, little thought is given to the date for the fiscal year-end.

Many company founders unconsciously identify the company’s fiscal year-end with the calendar year-end of December 31, and therefore automatically select this date. After the articles of incorporation have been issued, the business may choose any date as year-end provided the number of days of the fiscal year do not exceed 371.

However, conventional wisdom suggests that the last day of the chosen month is the most practical date since most businesses and financial institutions process client data on a month-end basis. Setting the year-end date at the end of your chosen month permits an easier cut-off and reconciliation process.

FACTORS TO CONSIDER

Inventory

If, for example, you are a retail business, physically counting inventory during your busiest sales period (i.e., Christmas) would disrupt business, so January 31 would be a good date for your year-end.

Inventory, as well as the level of in-store activity, will be at their lowest in January when your staff can count, price and value inventory without taking time away from selling. For a service industry such as landscaping, work-in-progress may have to be calculated. It may be best to have a year-end such as November 30, after the bulk of the contracts are finished.

Choose a year-end date that works with your accounting cycle.

Accounting

Choosing an arbitrary year-end such as December 31, which may not match your accounting cycle, could create issues for your in-house accounting staff as well as your CPA.

Internal staff is often overwhelmed with completing year-end procedures for payroll, government reports, and finalizing year-end inventory, not to mention cut off of receivables and payables or budgeting for the coming year. Such stress can lead to errors, increased overtime and frustration.

Your CPA may also not be as available to you if your year-end is December 31. They are consumed by tax planning and tax preparation for individuals. None of them may be in a state of mind to work with each other. They will all be frustrated with their own year-end requirements.

This is not the best formula for getting quality time with your CPA to analyze your financial results.

Start-Up Capital

When a business starts up, cash flow difficulties are common, given the need to borrow working capital for start-up costs and capital assets. If by good fortune, the business does extremely well in its first year and substantial taxable income materializes, a year-end set 365 days from the date of incorporation may be advisable.

Since there is no requirement to pay monthly or quarterly instalments in the first year of operations, the business gets the maximum tax deferral by setting the first year-end as late as possible. A later year-end would lessen the actual cash outflow for corporate income tax and provide additional working capital in the start-up period.

The requirement to pay monthly or quarterly instalments begins in the second year, the payment amounts are determined by the taxable income reported in the first year. In case the first year-end was shorter than 365 days, the taxable income is normalized to reflect the income had it been for the full 365 days.

This may be helpful for seasonal businesses, to set a year-end before the peak income period because that would not only defer the tax liability of the first year but also reduce the required instalments in the second year. This allows businesses to have more working capital during the start-up phase.

Tax Deferral

Choosing a year-end of July or later allows tax deferral of corporate profits. Suppose, for a moment, that the corporate profit is $150,000. Rather than pay the corporate tax on the $150,000, management may decide to pay out the $150,000 in bonuses to various employees of the company.

If the bonus is declared for the July 2016 year-end but not paid until January of 2017, the income tax expense for the corporation is nil and the tax on the bonuses is not taxed in the hands of the recipient until it is paid in January of 2017. This approach provides working capital for the corporation that otherwise would have gone to the Canada Revenue Agency (CRA).

CHANGING YOUR YEAR-END

Your business may have changed over the years so that now there are compelling reasons to change its current year-end, such as staffing or administration issues that make it impossible to complete the year-end process in a timely fashion.

If, for instance, your business now has a high sales volume or high inventory at the current year-end date, it might be less disruptive to end the year on another date. If you are a subsidiary or highly dependent on another business such as a supplier, there could be administrative and accounting advantages to aligning year ends.

A request to change the year-end must be sent to the CRA. Changes can only be made for sound business reasons (i.e., not for an income tax benefit). A request for a change is not required if:

the corporation is wound up and the final return is filed with a shorter fiscal year
the corporation is emigrating to another country, is becoming exempt from tax or will cease to be exempt from tax
persons or a group of persons acquired control of the corporation under subsection 249(4) of the Income Tax Act.

Owner-managers should keep in mind that, if a change in year-end is granted, it will be necessary to produce financial statements and tax returns for a shorter period. Further, depending upon your accounting system, there may be additional costs in establishing the new year-end protocols.

Check With Your CPA Before Making A Change

Decisions about establishing a year-end or changing a year-end can be fraught with unforeseen income tax consequences for both the corporation and owner-managers if personal and corporate tax issues are not considered.

Entrepreneurs should meet with their CPA to discuss tax consequences; seasoned owner-managers should consider meeting with their CPA if making a change to the business year-end seems to be more and more necessary.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.