Who Is Affected by the Ontario Retirement Pension Plan?
With the Ontario Retirement Pension Plan taking shape, the provincial government is giving Ontarians the chance to weigh in on the proposed provincial pension plan. The Ontario Liberals released a consultation paper on “key design questions” of the ORPP, such as low-income earners and the self-employed. The discussion paper provides more details on the ORPP, including who’s covered.Who’s Covered by the ORPP?
When the ORPP is in full swing, the provincial government anticipates three million people to make $3.5 billion each year in contributions. The ORPP looks to be mandatory for everyone except those with defined benefit pension plans and newer target benefit plans. Unlike defined contribution pension and group RRSPs, defined benefit pension plans provide you with a retirement benefit for your lifetime based on your earnings and your years of service. Target benefit plans are a middle ground between defined benefit and defined contribution – they act much like defined benefit, but your benefit could be reduced based on how the plan’s investments perform.
Employers that offer alternative retirement savings plans, such as defined contribution pension plans, group RRPSs and pooled PRPPs, would be forced to join the ORPP. This would be quite a financial burden for employers, who would have little incentive to continue to offer these plans, if they must also pay into the ORPP. The government looks to be open to discussion, mentioning employers may be able to adapt their pension plans to be exempt from the ORPP.Self-Employed Individuals
When the ORPP was first proposed, many self-employed individuals were concerned about the financial burden it would put on their business. According to the Ontario Ministry of Finance , 700,000 people in Ontario reported self-employment income in 2011. Currently, self-employed individuals don’t have the option of opting out of the CPP. If you’re self-employed, you must contribute both the employer and employee portion of the CPP.
If you’re self-employed in Ontario you can breathe a sigh of relief. It doesn’t look like you’ll be forced in to joining the ORPP. Self-employed individuals are ineligible to join because of the federal Income Tax Act. However, the provincial government is looking into a voluntary opt-in. This seems like a win-win situation for the self-employed. The ORPP would provide self-employed individuals with some stability in income in their retirement, provided they choose to join.
Unlike the self-employed, small business owners would be forced to join. When you’re starting up a business, cash flow is key. Forcing small business owners to join the ORPP could result in tough decisions. While many large employers are in the position to absorb the added cost of the ORPP, small businesses struggling to stay afloat may have to freeze wages or lay off employees to balance the books.Low-Income Earners
The ORPP looks to be similar to the CPP in many respects, including how low-income earners are treated. Similar to the CPP, if you earn below $3,500, you will not be required to contribute to the ORPP.
Similar to the CPP, the ORPP will count as taxable income toward means-tested government benefits like the Guaranteed Income Supplement. Instead of helping low-income earners, the ORPP could result in claw-backs to the GIS. Not only will low-income earners lose a portion of their GIS, they’ll also be forced to start contribution to the ORPP. With many of these folks struggling to pay for the necessities of life like rent and food, contributions to the ORPP will take money out of the pockets of those most in need.
There’s still plenty of time to weigh in on the newly-proposed ORPP.
ORPP is now a Legislative Requirement
Bill 56, an Act to require the establishment of the Ontario Retirement Pension Plan was introduced and received first reading in the Ontario Legislature on December 8, 2014.
With this Act, the Ontario Government is now committed to the implementation of the Ontario Retirement Pension Plan (ORPP) no later than January 1, 2017.
While the legislation is short on detail, it is specific on the broad base structure of the Plan and the requirements that will be part of the final legislation.
The Act requires:
• Establishment and implementation no later than January 1, 2017
• An obligation to create an administrative entity to administer the Plan
• Implements a requirement for any Employer, public body or the federal government to provide information, including personal information, deemed required by the Minister
• The collection of information is exempt from subsection 39(2) – Freedom of Information and Protection of Privacy Act
The legislation also establishes basic requirements of the Ontario Retirement Pension Plan:
• Maximum contribution rate of 3.8% combined from employee and employer
• Maximum threshold equal to $90,000 (in 2014 dollars), adjusted to reflect increases established from 2014 to 2017 under the Canada Pension Plan.
• Minimum threshold to be established
• The obligation to deduct contributions from salary and wages will provide for transition rules concerning the rates.
The Ontario Government intends, through questionnaires and public consultations, to collect the feedback of Ontario residents and employers on the final aspects and implementation of the Ontario Retirement Pension Plan
The Power of the TFSA
As the calendar year changed on January 1, so did the Tax Free Savings Account (TFSA) contribution room available to all adult residents of Canada.
Although indexing did not increase the earned contribution room, everyone can now contribute at least $5,500 more to their TFSAs. Those who made withdrawals in 2013 can now put back the money withdrawn in addition to the extra $5,500. For those who have never made a TFSA contribution, the accumulated TFSA room is now $36,500 (less if they are between 19 and 24).
Through the power of tax-free compounding the TFSA can yield spectacular results, especially for those who are young enough for compounding to do its magic.
If you’ve put the maximum into your TFSA at the beginning of each year and it earned 5% income in each year, your current balance (after your last deposit) will be over $40,800. See the table below.
YearContributionInterest EarnedEnding Balance2009$5,000$250.00$5,250.002010$5,000$262.50$10,512.502011$5,000$525.63$16,038.132012$5,000$801.91$21,840.032013$5,500$1,092.00$28,432.032014$5,500$1421.60$35,353.632015$5,500$1767.68$42,621.32
For the younger generation, consider the potential for a tax-free retirement. Making the maximum contribution each year starting at age 19 would yield a nest egg of about $900,000 at age 60 (assuming 5% annual return, 2% inflation, no change in maximum contribution levels and no withdrawals). Even in today’s dollars, that’s $400,000 in spending power. For a couple that’s $1.8 million dollars. Even assuming an extended 40-year retirement, that’s an indexed tax-free pension of over $74,000 a year ($33,000 in current dollars).
Pay Yourself First
Although submission of a TD1 form is not required each year, it’s always a good idea to ensure that your employer is not withholding more taxes than absolutely necessary – after all, it’s your money.
The TD1 form – 2015 Personal Tax Credits Return – along with its provincial counterpart, determines how much tax your employer (or other payer) will withhold from your payments. To ensure that you get the money all year long rather than a year from now when you file your tax return, update your TD1 whenever your family situation changes and check it at least once a year. January is a good time to make that check.
On the TD1 you can claim your own personal amount ($11,327 for 2015), the amount for your spouse or common-law partner, amounts for eligible dependants, the caregiver amount, amount for infirm dependants, amount for pension income, tuition, education and textbook amounts, as well as amounts you are eligible to transfer from your spouse. Parents should note that the exemption for children under 18 is eliminated for 2015 unless the child is infirm. Even for infirm children, the claim is reduced to $2,093 for 2015 (down from $4,313 for 2014).
A sister form to TD1: Form T1213 Request to Reduce Tax Deductions at Source for Year(s) ______ can also be used to reduce tax withholding for taxpayers who have RRSP contributions, Child Care Expenses, deductible support payments, employment expenses, carrying charges, charitable donations, rental losses or other significant tax deductions. For all expenses except deductible support payments which may be authorized for two years, you’ll need to file Form T1213 each year. The form must first be sent to CRA for their approval before your employer is authorized to reduce your withholding tax. Approval may take four to six weeks so the earlier you submit the form the better.
Four reasons why you should still take CPP early
I’ve written extensively about the issues around taking CPP early. It’s one of the big conundrums of Canada Pension Plan and my conclusion is that it still makes sense to take CPP as early as you can in most cases. Here’s four questions to ask yourself in determining if it makes sense to take CPP early.Will you still be working after 60? Under the old rules, you had to stop working in order to collect early CPP. The work cessation rules were confusing, misinterpreted and difficult to enforce so it’s probably a good thing they will be a thing of the past.
Starting January 1, 2012, you can start collecting CPP as soon as you turn 60 and you no longer have to stop working. The catch is that as long as you’re working, you must keep paying into CPP even if you are collecting it. The good news is that paying into it will also increase your future benefit.What is the mathematical break-even point?
Under the old rules, the decision to collect CPP early was really based on a mathematical calculation of the break-even point. Before 2012, this break-even point was age 77. With the new rules, every Canadian needs to understand the math. Here’s the example of twins that I used before, with the break-even point updated to 2015 values.
“Janet and Beth are twins. Let’s assume they both qualify for the same CPP of $502 per month at age 65. Let’s further assume, Beth decides to take CPP now at age 60 at a reduced amount while Janet decides she wants to wait till 65 because she will get more income by deferring the income for 5 years.
Under Canada Pension Plan benefits, Beth can take income at age 60 based on a reduction factor of 0.58% for each month prior to her 65th birthday. Thus Beth’s benefit will be reduced by 34.8% (0.58% x 60 months) for a monthly income of $327.30 starting on her 60th birthday.
Let’s fast forward 5 years. Now, Beth and Janet are both 65. Over the last 5 years, Beth has collected $327.30 per month totaling $19,638. In other words, Beth has made $19,638 before Janet has collected a single CPP cheque. That being said, Janet is now going to get $502 per month for CPP or $174.70 per month more than Beth’s $327.30. The question is how many months does Janet need to collect more pension than Beth to make up the $19,638 Beth is ahead? It will take Janet 113 months to make up the $19,638 at $174.70 per month. In other words, before age 74.4, Beth is ahead of Janet and after age 74.4, Janet is ahead of Beth.”
This math alone is still a very powerful argument for taking CPP early. Another way to phrase this question is, “How long do you expect to live?”
Note that under the new rules, the mathematical break-even point will change again in 2016, when the reduction factor will increase from 0.58% per month to 0.6%. So for the above example, in 2016, Beth would get $321 instead of $327.30 at age 60. This will move the break-even point from age 74.4 to age 74.When will you most enjoy the money?
When are you most likely to enjoy the money? Before age 74 or after age 74? Even though the break-even point is three years sooner, for most people, they live the best years of their retirement in the early years. I call these the ‘go-go’ years (which is one of three phases of retirement).
Some believe it’s better to have a higher income later because of the rising costs of health care. Whatever you believe, you should plan for. It might be worthwhile to look around your life and see the spending patterns of 70, 80 and 90 year olds to assess how much they are really spending. Are they spending more or less that they did when they were in their active retirement years.What happens if you Leave money on the table?
Let’s go back to Beth who could collect $327.30 at age 60. Let’s pretend that she gets cold feet and decides to delay taking CPP by one year to age 61. What’s happened is that she ”left money on the table.” In other words, she could have taken $3,927.60 from her CPP ($327.30 x 12 months), but chose not to, to be able to get more money in the future. That’s fine as long as she lives long enough to get back the money that she left behind. Again, it comes back to the math. For every year she delays taking CPP when she could have taken it, she must live one year longer at the other end to get it back. By delaying CPP for one year, she must live to age 75 to get back the $3,927.60 that she left behind. If she delays taking CPP until 62, then she has to live until 76 to get back the two years of money she left behind. Why wouldn’t you take it early given this math? The main reason is that you think you will live longer and you will need more money the older you get.My two cents
I think if people understand the math of Canada Pension Plan, most people will take it early. In 2012, you can take it early even if you are working. The bad news is you will get hit with a bigger reduction with the new rules. Some say its also bad news because you will have to keep paying into CPP if you are working (under the new rules). To me, that’s not such a bad thing because paying into it also increases your future benefit so it’s not like you are not going to get your money back. I don’t think the increased reduction is enough of a deterrent because a bird in your hand is better than two in the bush.
Four Financial Numbers You Really Need To Know
When tracking your own financial progress from year to year, there are four financial numbers that you focus on in particular. They’re easy to calculate using information that’s readily available (mostly from your T4 slip and bank/investment statements) and it takes very little time:Your Net Worth
To calculate your net worth you take the value of everything you own and subtract the value of everything you owe. (Assets – Liabilities). This simple calculation is a great benchmark to track from year to year because it clearly shows you if you’re making progress in building wealth and creating financial security.Your Net Income
Thanks to taxes and other deductions there’s often a dramatic difference between our gross income and the amount we actually take home each pay cheque. Too often we focus on the gross amount rather than the net and this can lead to an over inflated view of how much we actually have available to spend. Basing your lifestyle on the $75,000 you make gross rather than the $50,000-$55,000 you take home (depending on which province you live in and your benefit premiums) gives you a distorted view of your financial situation and may leave you wondering where on earth all your money goes. Focusing on your net income figure allows you to make real plans for your money and helps you track whether your financial situation is improving year by year.Your Savings Rate
Taking the amount that you save each year and dividing it by your gross income gives you your savings rate. The savings rate in Canada has been less than 5% for a long time which is a big problem when you consider that experts have long recommended saving 10% of our gross income for retirement. It’s an even bigger problem when you factor in saving for other goals. Simply put, if you’re not saving then you’re not building a “buffer zone” to protect yourself against an unexpected drop in income or increase in interest rates. This makes you vulnerable. Putting a spotlight on your savings rate and doing what you can to maintain or increase it each year will help you stay out of debt and build a solid financial foundation.Your Credit Score
Your credit score is a reflection of how much debt you are currently carrying, how much you have available and your payment history. Creditors use your score as an indicator of whether you can handle new debts and how likely you are to default on loans. A low credit score makes it hard to access credit and can mean that you pay higher interest rates than someone with a higher score. Keeping track of your credit score and monitoring the information in your credit report helps you stay on top of your finances and detect any errors or any issues relating to identity theft. You can order a free copy of your credit report once a year by mail from Equifax and Trans Union. Equifax also allows you to access your credit score online for an additional charge.
Taking a look at each of these financial numbers at the start of each year, gives you a candid snapshot of your personal financial situation and allows you to identify any areas that you especially need to focus on over the next 12 months. It also lets you to see your progress from year to year which can be a great motivator.
No Time To Waste: TFSA, RRSP or Both?
It’s February – no time to waste.
There are two very important investment opportunities to take advantage of now, but you’ll need to plan to put much of that February pay and your savings accounts to work for you now. The smart money goal: be sure to make your RRSP and TFSA contributions.
MAXIMIZE RRSP DEDUCTIONS – CONTRIBUTE BY MARCH 2. Dig out your 2013 Notice of Assessment to check out your personal RRSP Contribution Room before the contribution deadline of March 2, 2015. Did you maximize your RRSP Room? If not, you could fatten up your tax refund. The maximum contribution room you could have earned for 2014 is 18% of earned income up to $24,270. But your room may be higher if you haven’t maximized your contributions in the past.
But, be sure you don’t over-contribute. Excess contributions – the amounts over your RRSP room plus $2000 - are subject to a 1% per month penalty tax, which must be paid by March 31. Form T1-OVP is a bit of a nightmare, so see a tax pro for help.
TFSA SAVINGS ROOM UP TO $36,500. Despite the fact that there were no increases to additional contribution room for 2015, you can and should contribute an additional $5,500 to your TFSA as soon as possible this year. TFSA contribution room became available to Canadian adult residents on January 1, 2009, providing a total of $36,500 of available room since 2009 (4 years at $5,000 and 3 years at $5,500).
Contributions to a TFSA are not deductible, however income earned within a TFSA and withdrawals made from it are not subject to tax. TFSA activity does not affect eligibility for federal income tested benefits and tax credits, such as Old Age Security, the Guaranteed Income Supplement, the Canada Child Tax Benefit, the Working Income Tax Benefit and the Goods and Services Tax Credit.
TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. You do not have to set up a TFSA or file a tax return to earn contribution room.
It’s Your Money. Your Life. You have every opportunity to set up your future to maximize your choices and live a peaceful financial life. Even if you can’t contribute the maximum to your RRSP or TFSA, try to increase your tax refund with an RRSP contribution before March 2. Then put that tax refund into a TFSA. Check with your designated tax specialists and financial professionals to make sure you are eligible.
Foreign Income Verification Reporting – Form T1135
Form T1135 Foreign Income Verification Statement is designed as an “information only” form tied with the personal tax return. While it is not actually part of the tax return, the due dates coincide with the due dates of tax returns, thereby tying it to the T1 return. When filing their tax return, the taxpayer identifies the need for filing the T1135 by their answer to the question “Did you own or hold foreign property at any time in 2014 with a total cost of more than CAN$100,000?” on page 2 of the T1.
Parts 1, 3, 5, and 6
In general, any individual, partnership, corporation, or trust which holds a foreign asset, is a beneficiary of a foreign holding or has a right to acquire a foreign holding is required to file the information return if the aggregate cost of the asset or holding exceeds $100,000. Reporting requirements for Parts 1, 3, 5, and 6 consist of the following information requirements:
• The country where the asset is held
• The maximum cost during the year of the holding
• The cost at the end of the year and,
• The amount of any income earned or lost on the holdings
“T” Slip Exclusion No Longer Available
In 2013, taxpayers had the option of using the “T” slip exclusion option. This consisted of the ability to not report individual holdings if there was a Canadian T5 or T3 slip issued for the income earned on the investment. This option is not available for 2014.
Part 2 – Shares of non-resident corporations (other than foreign affiliates)
This is one of the most difficult areas of form T1135 to complete; simply because accurate records of the information are difficult to obtain. This section no longer includes shares that are managed by a Canadian Registered Securities Dealer or Canadian Mutual Fund. These assets are now included in Part 7.
Include in this section any foreign share holdings that the taxpayer purchased on their own, either on-line or on a foreign stock exchange. Report both the cost and any income earned on the investment.
CPP – Now or Later?
One of the more difficult decisions for those approaching retirement is when to start receiving their CPP retirement pension.
In part 1 of this article, we will look at a number of factors that must be weighed to make that decision.
You can elect to begin receiving your CPP retirement pension as early as age 60 – but at a price. There is a penalty of 0.6% for each month the pension starts before your 65th birthday. Those who start at age 60 will suffer a penalty of 36% of their pension entitlement. Thus, if your Statement of Contributions from Service Canada shows that you would be entitled to a $1,000 per month pension at age 65, your pension will only be $640 per month if you start at age 60. If you continue to work after you receive your pension, you must still continue to contribute to CPP until age 65. After you reach 65, you can opt out of contributing if you’re already receiving your pension. On the bright side, those extra contributions will earn you a small additional pension called a post-retirement benefit.
If you delay starting your pension beyond your 65th birthday, you’ll receive a larger monthly benefit. Your pension will be increased by 0.7% for each month you delay – for up to 60 months. If you delay until your 70th birthday, your pension will be increased by 42%. For example, if you were entitled to a $1,000 per month pension at age 65, and you delay until age 70, your pension will be $1,420 per month. On the down side, you’ll have to continue contributing to age 70 if you continue to work. Those extra contributions will earn you an additional post-retirement benefit.
Perhaps the most difficult question to answer is “How long will I live?” The longer you live, the longer you’ll receive your pension and therefore the more you’ll get from CPP. A general rule of thumb is that if you’ll live beyond age 74, you will benefit from delaying the start of CPP. If you live to age 80 or beyond you’ll get more from CPP if you delay starting to age 70. The average Canadian who makes it to age 65 will live to about age 85.
When you die, the maximum death benefit from CPP is $2,500. If you have a spouse, they will be entitled to a survivor pension of 60% of the deceased taxpayer’s pension entitlement.
The maximum CPP retirement pension for 2015 is $1,065 per month (excluding any post-retirement benefit and increase for delaying). That maximum includes both the taxpayer’s own CPP retirement pension and any survivor pension that they are entitled to. This means that where both spouses have CPP pension entitlement, the amount of the survivor pension may be reduced or even eliminated.
Trust Legislation Enacted
inform their high net worth clients of recently enacted changes to tax benefits
arising from the use of trusts.
will require the review of their wills prior to the new rules taking effect on
January 1, 2016.
criticism of the federal budget proposals, on December 16, 2014 Bill C-43, Economic Action Plan 2014 Act,
No. 2 was enacted. When all of the provisions of the new
legislation come into force it will affect traditional estate planning in two
Rate Estates (GRE). Many traditional tax saving practices will only be
available to a Graduated Rate Estate (GRE). Only certain estates of deceased
persons qualify as GREs, and GREs can only last for up to 36 months.
Testamentary Trusts: The income of a spousal testamentary trust in the
year of death of the beneficiary spouse will be deemed to be the income of the
deceased beneficiary spouse and not the spousal trust.
to discuss the ramifications with your clients, as the effect of the
legislation may be objectively inequitable in certain circumstances. For
example, envision a case where the heirs of the deceased beneficiary spouse
(those who will end up paying the tax) are different from the residuary
beneficiaries of the spousal trust. In situations such as these, the heirs of
the deceased beneficiary spouse will pay the tax but will not receive the
assets. Currently, there is no remedy for this situation after the fact and
therefore estate planners would be prudent to advise their clients of this.
advisors may wish to argue that there should be certain grandfathering
provisions in the new legislation for wills that can no longer be changed; for
example, because the maker now lacks capacity or is already deceased (and the
will has not been probated).
These could be
devastating oversights that may lead to adverse tax results and/or expensive