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Bank of Canada cuts rates again


Bank of Canada cuts rates again -www.aliko-aapayrollservices.com/blog

Bank of Canada cuts rates again



OTTAWA (Reuters) - The Bank of Canada cut its benchmark interest rate by 25 basis points to 0.5 percent on Wednesday, saying an unexpected economic contraction in the first half of the year had added to excess capacity and put downward pressure on inflation.
"Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target," the central bank said in the interest rate decision that accompanied its quarterly Monetary Policy Report.
Bank of Canada Governor Stephen Poloz had expected a recovery by now from the oil price crash that hit Canada's oil-exporting economy in the first quarter, but that projection proved far too optimistic.
The bank now expects the economy to have shrunk at an annualized 0.5 percent in the second quarter instead of growing by 1.8 percent as Poloz had projected in April. It contracted 0.6 percent in the first quarter.
The bank did not use the word "recession" but the projection of negative growth in both the first and second quarters meets a widely accepted definition of a recession.
The market had been split on whether the bank would cut rates for the second time this year after holding them steady for about four years. The bank had delivered a surprise cut in January that was designed to counter the dive in oil prices, and markets had reacted sharply to that move.
They did so again on Wednesday with the Canadian dollar dropping to a six-year low, and Canadian government bond prices rising sharply and outperforming U.S. Treasuries. [CAD/]
The Canadian dollar tumbled to its weakest level - C$1.2929, or 77.35 U.S. cents - since March 2009 against its U.S. counterpart, hurt also by predictions that the U.S. Federal Reserve will raise rates this year.
"The currency is in uncharted waters here," said Derek Holt, vice president of economics at Bank of Nova Scotia, citing a risk that the Canadian dollar weakens to as low as C$1.30 against the greenback, then diving to C$1.40.
"If the Fed is hiking, we think by September, and the Bank of Canada appears to be leaving the door open to additional rate stimulus, all bets are off."
The bank said excess capacity in the economy grew significantly in the first half and would continue to do so in the third quarter, even with expected economic growth of 1.5 percent.
It therefore pushed back to the first half of 2017 its projection of when full capacity will be reached and inflation return to the bank's 2 percent target. Its previous projection had been for the end of 2016.
The bank acknowledged elevated vulnerabilities from a hot housing market in Toronto and Vancouver and from rising household debt, a key factor that had spurred some economists to advise against a rate cut. It said, however, that the economy was undergoing "a significant and complex adjustment" and required additional stimulus. It continued to see a soft landing in housing.
Perhaps the biggest disappointment for Poloz, former head of the federal export agency, has been what the bank said was a "puzzling" weakness in non-energy exports. He had hoped such exports would help overwhelm the negative effects of lower oil prices on business investment and incomes.
But the bank said its base-case projection assumes "that this unexplained weakness is temporary and that the relationship between exports and foreign activity will reassert itself in the coming quarter".
The bank said the main dangers to its inflation outlook were a larger-than-expected decline in oil and gas investment, weaker non-energy exports, imbalances in the Canadian household sector and stronger U.S. private demand.
 
 
 
 
 

OAS to Increase by $1.13 per Month


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OAS to Increase by $1.13 per Month


Seniors will see an increase in their monthly OAS cheques in July, but they’ll have to resort to the 99-cent menu to buy anything with the extra pension.
Old Age Security is indexed quarterly and seniors have seen no increases since October of 2014. 
The maximum OAS (for those who have been in Canada at least 20 years and started on their 65th birthday) increases from $563.74 to $564.87 – an increase of $1.13 per month or 0.2%.  Seniors who qualify for the Guaranteed Income Supplement or Allowance will also receive the 0.2% increase beginning in July.
 
 
 

Selling the US Vacation Property



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Selling the US Vacation Property


With real estate prices soaring in the US and the Canadian dollar falling in value against the greenback, Canadians who invested in a vacation property in the US may be tempted to sell their US cottage and purchase a Canadian cottage instead. 
 
But it’s important to understand the tax consequences on both sides of the border before they do.
Here’s an example to illustrate:   Sarah and George purchased a home in Phoenix in 2011 for $190,000US ($191,000CAN), including costs. Today, the home is worth $290,000US (about $358,000CAN). This represents an accrued gain of $167,000CAN (a $100,000 US gain in the States). The value of the couple’s home in Canada, meanwhile,  has increased only $20,000 over the same time period. What are the tax consequences if the couple sells the US property and uses the proceeds to purchase a cottage closer to home?
The disposition of the US property will create a taxable capital gain to be reported on a US return ($100,000 US). In Canada, the capital gain could be minimized by designating the US property as the couple’s principal residence for all but one year from 2011 to 2015. However, the elimination of the capital gains tax on the Canadian return comes at a price. If the gain is taxable in Canada, the US taxes paid could be claimed as a foreign tax credit.
But if the gain is tax-free in Canada, the foreign tax credit cannot be claimed. At the same time, claiming the US property as a principal residence means the gain on their Canadian home becomes taxable.
Since the US tax cannot be eliminated, the only way to ensure that the same gain is not taxed in both jurisdictions is to make sure that at least $100,000US of the capital gain is taxed in Canada in the year of sale. That’s about $123,000CAN, depending on the exchange rate at the time of the sale.
 
With a $167,000CAN gain, 26% of the gain could be exempted and the couple could still claim the foreign tax credit. By choosing to designate the US property as their principal residence for one year, 33% ([1+1]/6) of the gain would be exempt in Canada, limiting the foreign tax credit claim.
By choosing not to designate the US property as their principal residence, 1/6 of the gain would be exempt, allowing the full foreign tax credit.
Of course, in this or any other case, the actual amount of taxes payable in the US and Canada would have to be determined to ensure that choosing not to claim the principal residence exemption for any of the years owned results in the lowest overall taxes payable.
This type of transaction, therefore, should be reviewed well in advance by a Tax Services Specialist  to get the best tax results over time for the sale or deemed disposition of both residences.
 
 
 
 

Five Steps To Calculating 2015 TFSA Contribution Room

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Five Steps To Calculating 2015 TFSA Contribution Room



A new version of form RC343 has been released by the CRA to calculate TFSA contribution room for 2015, taking into account the new 2015 contribution limit of $10,000.
 
The new form is available here.  Here’s how the calculations work:
1. Start with your TFSA contribution room as of January 1, 2014
2. Subtract any TFSA contributions made in 2014
3. Add any TFSA withdrawals made in 2014
4. Add $10,000 (your new  TFSA contribution limit for 2015)
5. If you’ve already made TFSA contributions for 2015, subtract those
Here’s an example:
Joni had  TFSA contribution room of $12,000 as of January 1, 2014, including the $5,500 of new contribution room for 2014. She made a $10,000 TFSA contribution in 2014 and withdrew $15,000 that same year. She has not made any contributions in 2015 yet.  Following the steps outlined above, her 2015 TFSA contribution room is:
1. $12,000
2. - $10,000
3. + $15,000
4. + $10,000
5. - $0
Total: $27,000
 
Beware of TFSA Traps:  The biggest trap, other than holding non-registered investments outside a TFSA when there is contribution room available, is recontributing to the TFSA in the same year as the withdrawal is made. Withdrawals do increase TFSA contribution room, but not until the beginning of the following year.
In the example above, after her $10,000 contribution, Joni’s TFSA contribution room for 2014 was reduced to $2,000. Her $15,000 withdrawal did not open up contribution room until January 1, 2015. If Joni had re-deposited the $15,000 in 2014, she would have had a $13,000 excess contribution. All excess contributions are subject to a 1% penalty tax for each month they remain in the TFSA.
For these reasons, it’s important for wealth advisors to encourage their clients to seek their assistance or consult with  A Tax Services Specialist  before withdrawing money or recontributing it to a TFSA.
 
 
 
 
 

Everything You Need to Know About RRIFs

Everything You Need to Know About RRIFs-  www.aliko-aapayrollservices.com/blog




Everything You Need to Know About RRIFs
Written by Jim Yih
 
Most Canadians choose a Registered Retirement Income Fund (RRIF) as their retirement income option. A RRIF is a comfortable transition because of its similarity to an RRSP. A RRIF provides a high level of control over the investments in your retirement plan, the advantage of tax-free growth of assets within the plan, as well as maximum flexibility in establishing an income stream. RRIFs come in a number of shapes and sizes.
The first decision is income
The first thing you will need to determine is how much income you need or want. This decision will have the greatest impact on the longevity of your money. If you spend too much too fast, you will run out of money. Even if you don’t need or want the extra income, you have the minimum income rules to contend with.
You can tailor your income to your needs, subject to minimums imposed by the federal government. If you need steady monthly, quarterly, or annual income, it’s available. If you require a large lump sum for a major purchase, travel, or some other purpose, that’s available too.
RRIF withdrawal rules
This table outlines the minimum withdrawals on RRIFs established after 1992, as set by the government. Before age 71, the minimum percentage payout is worked out in the following way: 1÷(90 – your current age).  RRIF minimums were once again changed in 2015
So if you’re 65, your minimum withdrawal would be 1÷(90-65)=4%. With a $100,000 RRIF, that amounts to $4,000. Once you reach age 69, the following schedule applies:
Age
2015 and later
1992 to 2015
Pre 1992
65
4.00%
4.00%
4.00%
66
4.17%
4.17%
4.17%
67
4.35%
4.35%
4.35%
68
4.55%
4.55%
4.55%
69
4.76%
4.76%
4.76%
70
5.00%
5.00%
5.00%
71
5.28%
7.38%
5.26%
72
5.40%
7.48%
5.56%
73
5.53%
7.59%
5.88%
74
5.67%
7.71%
6.25%
75
5.82%
7.85%
6.67%
76
5.98%
7.99%
7.14%
77
6.17%
8.15%
7.69%
78
6.36%
8.33%
8.33%
79
6.58%
8.53%
8.53%
80
6.82%
8.75%
8.75%
81
7.08%
8.99%
8.99%
82
7.38%
9.27%
9.27%
83
7.71%
9.58%
9.58%
84
8.08%
9.93%
9.93%
85
8.51%
10.33%
10.33%
86
8.99%
10.79%
10.79%
87
9.55%
11.33%
11.33%
88
10.21%
11.96%
11.96%
89
10.99%
12.71%
12.71%
90
11.92%
13.62%
13.62%
91
13.06%
14.73%
14.73%
92
14.49%
16.12%
16.12%
93
16.34%
17.92%
17.92%
94
18.79%
20.00%
20.00%
95+
20.00%
20.00%
20.00%
The second decision is what to invest in
Financial institutions offer plans that can hold Guaranteed Investment Certificates (GICs), mutual funds, cash, or other financial instruments. Alternatively, you can establish a self-directed RRIF to include a combination of individual securities in your plan, such as stocks, bonds or Treasury bills (in addition to the investments mentioned above).
RRIFs offer investment flexibility. You can hold the same investments that are eligible for an RRSP. Shares of Canadian corporations, corporate and government bonds, Canada Savings Bonds, Treasury bills, mortgages, GICs, term deposits, covered call options, warrants, rights, and mutual funds that invest in eligible securities are all qualifying investments. You can also hold a limited percentage of your RRIF in foreign investments. Just like an RRSP, a RRIF lets you retain control over your investments, rather than handing over your money to a third party.
The longevity of your RRIF is simply based on how much money you make in investment return and how much you take out for income. It does not take a lot of mathematical know how to figure out that if you earn more money than you withdraw in income, the RRIF will grow.
For example, if you invest in a GIC RRIF at 6% and you take out the minimum (4.76%) at age 69, your RRIF should grow by 1.24%. At age 72 given the same investment return, the minimum is now 7.48%. This means your RRIF will deplete in value by 1.48% (7.48%-6.00%).
What will happen to your RRIF when you die?
You can leave your remaining RRIF assets to your heirs upon your death by designating the proper beneficiary. Not all other retirement income options provide for this. Naturally, your desire to provide an estate for your spouse, beneficiaries or charities may have an impact on how you set up your RRIF. While this may or may not be an issue, income and investments should remain the priorities.
RRIFs are flexible
One of the benefits of the RRIF is the flexibility you have in dictating income. These are some common types of RRIFs.
  • Minimum income RRIF – This RRIF provides the minimum level of income. Typically, people who choose the minimum income RRIF are those who do not need the money and want to defer taxable income for as long as possible. Remember, if this is the case, you can base the RRIF on the age of your younger spouse.Furthermore, remember the RRIF minimum income is based on the value of the RRIF on December 31 of the previous year. Sometimes this can make income planning difficult because you really don’t know what your income will be until the last minute.
  • Capital preservation RRIF – Preserving capital and paying out a fixed level of income are the goals of this RRIF type. In this case, you will withdraw your investment returns each year (subject to minimums). If you are using mutual funds, you might elect a reasonable target return like 8%, for example, with the hopes and intentions of earning 8% to maintain the capital.
  • Level income RRIF – If you want to provide income for a specific period of time such as to age 90, this RRIF would be the right choice. In this instance, you would determine the amount of income you could derive so that the entire asset would be depleted by the time you reach 90 years of age. You can use age or time frame.Have as many RRIFs as you wantYou can have as many RRIFs as you want. You can have one that pays a level income for the next 5 years to bridge income until government benefits. You can have another that is a capital preservation RRIF for a more stable long term level of income.Generally, many people consider consolidating into one RRIF. With a single RRIF, you can easily manage your investments and you’ll only have to worry about one minimum withdrawal. Several RRIFs require more time and energy, and you’ll have to arrange to withdraw at least the minimum from each one.Withholding tax detailsRRIF income is subject to government withholding tax rates. Just like your employer withholds taxes and remits them directly to the government, your RRIF administrator is required to do the same. Minimum income RRIFs are not subject to withholding tax, but you can request any level of withholding tax desired. In all other circumstances, there is a 10% withholding rate on withdrawals less than $5000, 20% on withdrawals between $5000 and $15,000 and 30% tax on withdrawals over $15,000.As you can see, there are a lot of issues to deal with when it comes to planning your RRIF income. Take the time to plan wisely.

Scenario 4: Seniors Without TFSAs


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Scenario 4:  Seniors Without TFSAs

By: Walter Harder
Robert and Jackie are contemplating retirement.  Robert is 65, earns $55,000 from employment and also receives a $24,000 pension.
 
Robert and Jackie are contemplating retirement.  Robert is 65, earns $55,000 from employment and also receives a $24,000 pension.  He has not started to receive OAS or CPP but is contemplating retirement at age 67.  Jackie is 62 and earns $45,000 employment income.  Jackie has accumulated $150,000 in her RRSP.  Both Robert and Jackie have no TFSA contribution room.
Will Robert and Jackie be better off in 2015 than in 2014?
This couple derived no benefit from the Family Tax Cuts announced in October 2014.
Indexation of the tax brackets and personal amounts will result in slight reductions in taxes payable by both Robert and Jackie unless their income levels increase.  Robert’s contributions to CPP and his EI premiums will increase due to increases in the maximum pensionable and insurable earnings.
As the couple has no TFSA contribution room, they have been making the maximum contributions under the old limit so they will benefit from being able to contribute more.  In the long term, the increased TFSA contribution room may help Jackie shelter earnings on RRIF minimum withdrawals if they money is not needed to fund their lifestyle.
The decrease in minimum RRIF withdrawals may help Jackie to plan her RRIF melt-down strategy once she reaches age 72.
If this couple is philanthropically inclined and have real estate such as a cottage that has increased in value, they could benefit from the new rules allowing the proceeds from real estate to be donated to charity in order to reduce capital gains tax.
Since both Robert and Jackie are currently working, they are not likely to be benefit from the new Home Accessibility Tax Credit in the short term. Should either develop mobility issues, they may be able to modify their home to accommodate their mobility issues while getting a 15% tax credit for the first $10,000 of their expenditures.
 
 

Scenario 3: Retired Couple with RRIFs


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Scenario 3:  Retired Couple with RRIFs

BY: Karen Milner

Brian and Patricia retired a few years ago.  Brian is 74 and Patricia is 72.  The couple live in Halifax, NS and have RRIF balances of $300,000 and $400,000 respectively.

 

Will Brian and Patricia be better off in 2015 than in 2014?

This couple derived no benefit from the Family Tax Cuts announced in October 2014.

The reduction in RRIF minimum withdrawals will affect both Brian and Patricia.  Under the old rules, Brian was required to withdraw at least $23,130 from his RRIF.  Under the new rules, he is only required to withdraw $17,010.  If he has already withdrawn more than $17,010, he will be able to redeposit the excess (to a maximum of $6,120).

Under the old rules, Patricia was required to withdraw at least $29,920 from her RRIF.  Under the new rules she is only required to withdraw $21,600.  If she has already withdrawn more than $21,600, she can put back up to $8,320.

By withdrawing less, both Brian and Patricia can reduce their tax bill for 2015.  In addition, Patricia’s age amount could be increased by the reduced withdrawal (depending on how much other income she has).

This couple may well be able to benefit from the Home Accessibility Tax Credit if they need to make renovations to their home to make it more accessible.  Under this new program, 15% percent of the first $10,000 renovation costs could be eligible for a non-refundable tax credit.

If either Brian or Patricia has foreign assets with a value between $100,000 and $250,000, they’ll be happy to learn that the sometimes onerous rules for reporting such assets will be simplified for 2015.

This couple may also be able to take advantage of the new rules exempting capital gains on small business corporation shares or real estate investments if a portion of the proceeds is donated to charity.  If they are selling a family farm, they will be happy to know that the capital gains exemption on farm property has been increased to $1,000,000, exempting up to $500,000 taxable capital gains from tax.

The increase in TFSA contribution limits may allow for more flexibility in retirement as any minimum RRIF withdrawals that are not needed to fund lifestyle, can still be sheltered from tax (after the tax is paid on withdrawal).

 

 

6 Costly Pension Mistakes and How to Avoid Them

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6 Costly Pension Mistakes and How to Avoid Them
Written by Sean Cooper
 
 
If you have  a pension plan at work consider yourself fortunate. Only about a third of Canadians have a workplace pension plan today – a far cry from a couple decades ago. Workers  face a number of retirement challenges today. The low interest rate environment coupled with longer life expectancy means we need to sock away even more money for our golden years or face a drop in the standard of life we’ve become accustomed to.
If you have a decent pension plan, there are still mistakes you can make along the way. Having worked as a pension analyst for five years, I’ve seen my fair share of costly pension mistakes. Here are three costly pension mistakes that can cost you dearly and how to avoid them.
Not Returning Your Paperwork on Time
When you decide to retire or your employment comes to an end, you should receive a pension benefits statement in the mail shortly. If you’re eligible for an early retirement, the package will include forms of pension to choose from, such as life only, guaranteed  periods and joint and survivor options. If you’re too young to retire (and not considered a small benefit), you’ll be able to defer your pension (start it at a later date) or transfer your commuted value.
Mistake #1: 90 Day Deadline: Deferred Pension
While you should take the time to carefully review your package for any errors and carefully consider your options, it’s important to watch the deadline on your package. You’ll usually only have 90 days to return your completed paperwork. If you fail to return your paperwork your pension could be deferred until retirement.
For a 30-something-year-old this can be a costly mistake. If you’re not going to retire for another 30 years or longer, your pension will have lost a lot of its purchasing power by then. Remember the rules of 72 – if inflation only goes up by a modest average of 2 per cent per year, prices will double in 36 years, while your pension will be frozen. $1,000 per month may seem decent today, but when you go to retire it may not be a lot. Most private sector pension plans don’t offer indexing in retirement.
Mistake #2: 6 Month Deadline: Recalculation
Although some pension plans still allow you to transfer the commuted value after 90 days, there’s another important deadline you should be aware of. If you fail to return your paperwork in 6 months (90 days in Quebec), your commuted value will be recalculated. Depending on current interest rates, your commuted value could go up or down .
The commuted value represents a lump sum payment you’ll be able to invest to end up with an equivalent pension at your normal retirement date (NRD). The commuted value and interest rates have an inverse relationship. When interest rates go down your commuted value will increase (you’ll need to invest more money to end up with an equivalent pension at NRD), but if interest rates go up your commuted value will decrease (you’ll need to invest  less money to end up with an equivalent pension at NRD).
If interest rates go up by a lot by the time you return you paperwork, you could see your commuted value drop by hundreds or thousands of dollars. If you had simply completed it on time, you would have received your full commuted value with interest. If you’re transferring your commuted value to a financial institution, it’s important to follow up to ensure the paperwork is completed. You should phone the pension administrator to make sure your completed paperwork has been received and is being processed. It is your responsibility to make sure your financial institution returns your paperwork on time.
Mistake #3: Quitting Before You’re Fully Vested
Before you decide to leave your employer, it’s important to know the date you’ll be fully vested. What’s vesting? It’s the date you’re entitled to the full value of your accrued pension when you leave the pension plan. Leaving prior to reaching your vesting data can result in leaving hundreds or thousands of dollars on the table. Instead of receiving the commuted value, you’ll only be entitled to your contributions with interest. If it’s a non-contributory plan you won’t receive anything.
How do you find out your vesting date? Your vesting date can be found on your annual statement of pension benefits. Your vesting date depends on your work province, as well as how generous your pension plan is. In most provinces  the legislated minimum is two years before you became vested. That’s slowing changing as the provinces look to modernize. Provinces like Ontario and recently Alberta provide for immediate vesting. That means as soon as you join your company’s pension plan you’re vested.
To get around the new vesting rules, some employers may look to extend the eligibility for joining the plan. Instead of being able to join immediately, you may have to wait two years to be enrolled. If you’re a new employee, it’s important to ask if you’ll be enrolled in the pension plan right away. If you’re unsure, be sure to ask human resources or your pension administrator.

3 More Costly Pension Mistakes and How to Avoid Them

 

Written by Sean Cooper •

Last month we looked at three costly pension mistakes to avoid. Common pension mistakes include not returning your paperwork on time and quitting before you’re vested. This month we look at three more pension mistakes that can cost you dearly. Although it may not seem like a big deal, simple things like not updating your spouse and beneficiary and not joining your pension plan right away can come back to haunt you. Here are three more costly pension mistakes and how to avoid them.

Mistake #4: Not Updating Your Spouse and Beneficiary

It’s important to keep your spouse and beneficiary on file up to date. If you pass away in retirement and elected a pension with a guarantee period (i.e. 5, 10 or 15 year guarantee), you’ll want to make sure the remainder of the guarantee payments goes to the person you want. Just because you chose your daughter to be your beneficiary when you retired, doesn’t you won’t want to change it. What if you get remarried and decide to make your new spouse your beneficiary? Unless you complete a new beneficiary form, your beneficiary will stay the same. That means your daughter will still be entitled to your pension death benefit when you pass away, leaving your new spouse with nothing.

Things get even more complicated if you pass away before retirement. The pension death benefits for a pre-retirement death (or active death) depend on your pension plan and province of employment. Your spouse is usually entitled to the death benefit even if you beneficiaries on file. Even if you have a spouse, it’s still a good idea to name beneficiaries; if your spouse and you were to pass away at the same time (for example in a car crash), your beneficiaries would receive the death benefit instead of your estate. Again, it’s a good idea to complete a new beneficiary form.

Mistake #5: Not Joining Your Company’s Pension Plan Right Away

While a lot of employers enroll their employees in the pension plan right away, some employers leave it up to their employees to enroll. If you have a defined contribution plan, sometimes your employer will only deduct the minimum contributions off your pay cheque (for example, 2 per cent instead of the maximum 5 percent of your earnings).

As soon as you’re eligible to join your company’s pension plan, you should walk, no run, to your company’s human resources department to sign up. By not joining right away, you’re leaving free money on the table. You may prefer to invest your own money in your RRSP, but if you’re one of the lucky few with a non-contributory gold-plated defined benefit pension plan, there’s no good reason not to join.

Mistake #6: Not Starting Your Pension When You’re Entitled to An Unreduced Pension

If you choose to defer your pension (leave it in the pension plan) instead of transferring it to your RRSP, it’s important to make sure you keep your address up to date with your former employer. When you’re approaching your normal retirement date, your former employer will usually try to contact you, but only if they have your most recent address on file.

If you’re approaching age 65, it doesn’t hurt to take the initiative and contact your former employer about starting your pension. You’ll want to make sure you start your pension on time; although you may still be able to collect your pension retroactively to age 65 if you commence it later on, in most cases you won’t receive interest.

 

 


 
 

Who Is Affected by the Ontario Retirement Pension Plan?

Who Is Affected by the Ontario Retirement Pension Plan? - www.aliko-aapayrollservices.cm/blog
 
 
 
 
Who Is Affected by the Ontario Retirement Pension Plan?
 
 
Written by Sean Cooper
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

ORPP is now a Legislative Requirement -www.aliko-aapayrollservices.com
 
 
 
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

The Power of the TFSA -www.aliko-aapayrollservices.com
 
 
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).
 
 
 

Four reasons why you should still take CPP early

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Four reasons why you should still take CPP early
 
 
Written by Jim Yih
January 1, 2012 was an important date for Canada Pension Plan because the new CPP rules come into effect.
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.
If you want to see the new breakeven points for 2012 to 2016, visit Taking CPP early:  The new breakeven points
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.
 
 
 
 
 
 
 
 
 

No Time To Waste: TFSA, RRSP or Both?

No Time To Waste: TFSA, RRSP or Both? -www.aliko-aapayrollservices.com/blog
 
 
 
 
 
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.
 
 
 
 
 
 
 
 
 

CPP – Now or Later?

CPP – Now or Later? -www.aliko-aapayrollservices.com/blog
 
 
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.
Starting Early
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.
Delaying
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.
Longevity
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.
Death
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.
Pension Limits
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.
 
 
 
 
 
 
 

New Trust Legislation Enacted

New Trust Legislation Enacted
New Trust Legislation Enacted-www.aliko-aapayrollservice.com/blog
 
Advisors should inform their high net worth clients of recently enacted changes to tax benefits arising from the use of trusts. 
 
These changes will require the review of their wills prior to the new rules taking effect on January 1, 2016. 
Despite widespread 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 primary ways:
a) Graduate 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.
b) Spousal 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.
It’s important 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.
Some legal 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 litigation.