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Tax changes to expect when you’re expecting
2016 Tax Tips for 2015 Filing Year
From Proprietorship to Corporation - When is the Best Time to Incorporate?
Tax Specialists Brief your Clients About CRA Fraud And E-Mail Scams
Bank of Canada cuts rates again

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From Proprietorship to Corporation - When is the Best Time to Incorporate?


From Proprietorship to Corporation - When is the Best Time to Incorporate?- www.aliko-aapayrollservices.com/blog
From Proprietorship to Corporation - When is the Best Time to Incorporate?



The  dog days of summer are a great time for the Tax Specialist to review 2014 returns for Proprietors and Partnerships to determine whether it is time for some of these taxpayers to consider incorporating their business and removing their business from their personal tax return. But when is the best time to incorporate?
 
The answer to this question varies depending on the needs of the financial needs of the individual taxpayer, the vision for their business and their ability to take their business to its next level of growth; however, a few basic questions will help determine if you should be approaching your client with the suggestion, from a tax savings point of view:
1. Is the taxpayer currently paying a higher effective income tax rate than the corporate tax rate for the province of residence?
The current federal tax rate for a Canadian Controlled Private Corporation is 11% on the first $500,000 of net income. Provincially, rates vary by province from a low of 0% in Manitoba to 4.5% in Ontario and PEI. To put this in perspective, a net corporate income of ~$34,000 in Ontario attracts about a 15.5% effective tax rate. If this corporate tax rate is lower than the proprietor’s personal income tax rate, it may be time to look at incorporating.
2. Is the taxpayer earning more money in the proprietorship than is required to meet their personal and household needs?
A corporation’s lower income tax rate is only effective if the earned income remains within the corporation. If the proprietorship is earning $100K and the taxpayer needs $100K, it is unlikely that a corporation is beneficial for tax purposes.
3. Is there a liability or asset protection benefit to incorporation?
Even if there is no tax benefit to incorporating, there may be a benefit from a liability or asset protection viewpoint. A corporation is a separate legal entity; therefore, the individual cannot be held personally liable for debts incurred within the corporation. This protection can go a long way to protecting family wealth in the event of a business mishap.
 
4. Is there currently income-splitting potential within the proprietorship?
In most cases the answer to this is no. However, within a corporate structure different classes of shares can be issued, opening up various dividend options. This will then allow income sprinkling among family members to take full advantage of individual graduated rates, exemptions and deductions.
5. Is your client financially disciplined enough to manage a fiscal year-end?
One of the underlying advantages to operating through a corporate structure is the ability to establish a non-calendar fiscal year. This opens up income deferral options, allowing the taxpayer to retain more wealth longer by utilizing ITA S. 78(4).
 
Example – S. 78(4)
  • Acme Corporation has a fiscal year-end of July 30th and elects to declare a bonus payable of $30,000. The bonus is expensed on the corporate tax return as of July 30, 2015.
  • The bonus is then paid to the individual on January 3rd, 2016 – within the 179 day requirement of S. 78(4).
  • The bonus is reported on the T4 slip for 2016 and reported on the personal tax return filed April 30, 2017, resulting in a 21-month deferral of personal income taxes.The move from proprietorship to corporation may hold many benefits for the individual taxpayer and at the same time opens up many tax planning and wealth retention opportunities for the individual and their Tax Specialist to explore as the business continues to grow.

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.
 
 
 
 
 

Selling the US Vacation Property



Selling the US Vacation Property -www.aliko-aapayrollservices.com/blog

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.
 
 
 
 

Adjusted Family Tax Cut: Was Spouse A Student?



Adjusted Family Tax Cut: Was Spouse A Student? - www.aliko-aapayrollservices.com/blogAdjusted Family Tax Cut: Was Spouse A Student?




Last week, CRA reminded families to apply for the generous new Universal Child Care Benefit (UCCB) being delivered to families this week. But there may also be more good news:  enhanced Family Tax Cut dollars available for the 2014 tax filing year for families in which one spouse was a full- or part-time student... $2 to $750 more in fact.
The calculations for the Family Tax Cut have recently been adjusted to take into account the unused portion of tuition, textbook and education credits transferred from a spouse or common-law partner. The result is an additional refund of somewhere between $2 and $750, according to the CRA, which will do the calculation automatically if it looks like the family might qualify for the adjustment.
To be sure, however, qualified  Tax Services Specialist  should be consulted to review the calculations for their clients who  have made a tuition, textbook and education credit transfer to their spouse on line 326 of the 2014 T1 return and determine if any other adjustments should be made to the tax return.  Then, find out what your estimated Family Tax Cut will be in 2015 to maximize your investment planning opportunities.
The adjusted calculation can be found on line 499 on the new Schedule 1A, released on June 25:  http://www.cra-arc.gc.ca/E/pbg/tf/5000-s1a/5000-s1a-14e.pdf
 
 

The Rule of 72


The Rule of 72 - www.aliko-aapayrollservices.com/blog
The Rule of 72



Written by Sarah Milton
“Compound Interest is the eighth wonder of the world.” – Albert Einstein
Einstein described compound interest as the eighth wonder of the world because he felt that those who understood it, earned it and those who didn’t, paid it. Compounding is what makes saving early and saving regularly such a powerful part of building wealth and it’s also what makes it so hard to get out from under the mountain of consumer debt that so many of us accumulate. In an nutshell, compound interest is earning (or paying) interest on interest. When you earn interest at a compounded rate, your money grows faster because you are earning interest on your total balance (principal + interest) rather than on the principal alone. Similarly, when you pay interest at a compounded rate (as you do with credit cards) your interest charges grow much faster and your debt load gets larger.
We can see the power of compounding in the table below, which shows how $1000 earning 5% annual interest grows over time. The first column shows how the $1000 would grow earning 5% simple interest (earned on just the $1000 principal) and the second column shows how it would grow earning 5% interest compounded annually (earned on the principal + interest).
YEAR
5% SIMPLE INTEREST
5% COMPOUND INTEREST
5
$1,250
$1,276
10
$1,500
$1,629
15
$1,750
$2,079
20
$2,000
$2,653
25
$2,250
$3,386
30
$2,500
$4,322
35
$2,750
$5,516
40
$3,000
$7,040
45
$3,250
$8,985
50
$3,500
$11,467
The Rule of 72
The rule of 72 is a simple way to estimate how long it will take your money to double in value at a given interest rate. If you divide 72 by the annual interest rate, the answer is the number of years it will take to double. For example, 72 divided by 5 is 14.4. This means that, as you can see in the table above, it takes just under 15 years for $1,000 to become $2,000. 15 years later (in year 30) the money has doubled again to be just over $4,000 and, 15 years after that (in year 45) it has doubled again to become more than $8,000. In year 60, it will have doubled yet again and become $16,000. Using this rule, it’s clear to see that both time and interest rate are two key factors in building wealth. At 8% interest, your money will double in 9 years (72 divided by 8 = 9) but it will take 36 years to double earning 2% interest. For a 20 year old, $100 invested at 7% is worth $2,100 at age 65. For a 30 year old, that same $100 invested at the same rate is only worth $1,068 at age 65 and for a 40 year old, $100 invested at 7% is worth just $543 at age 65. This means that, at 40 years old, even though I’m only twice the age of the 20 year old, I have to save four times as much each year in order to achieve the same level of wealth at age 65. It’s a concept that I wish I had understood as a teenager because I’m pretty sure it would have motivated me to manage my money differently!
At the end of the day, saving is always a very personal decision: the choices we make about whether to save, where to save and how much to save, vary enormously from person to person. However, all too often, I hear people in their twenties saying that they’ll wait to save until they’re older because then they’ll be earning more. When you consider how powerful a factor time is in the wealth building equation, it just doesn’t make sense (especially when you consider that just because you’re earning more doesn’t mean you have more discretionary income). If you can do as much with $25 at 20 as you can do with $50 at 30 or with $100 at 40, it makes sense to start the saving habit early.
Even if you feel like you’ve “missed the boat” because you should have started saving years ago, remember that whatever you save today has a greater power to grow than money you save next month, next year or 3 years from now. We can’t change our past choices but we always have the power to choose to change our financial future by making different choices today.
 
 
 
 
 

Reminder: Some families Will Win UCCB Lottery July 20

Reminder: Some families  Will Win UCCB Lottery July 20/www.aliko-aapayrollservices.com/blog
Reminder: Some families  Will Win UCCB Lottery July 20

 


Following are the key points about the UCCB   benefit:

  • The UCCB is increasing for children under 6, from $100 per month per child to $160 per month, effective January 1, 2015.

  • The UCCB is also being expanded to include a benefit of $60 per month for each child aged 6 through 17, effective January 1, 2015.

  • Because these enhanced benefits were announced in April  21 , 2015 but made effective retroactive to January 1, 2015, families who qualify for the UCCB will receive a lump sum for the additional amounts, payable on July 20, 2015.What does that mean?  Parents with children under age 18 living at home will be receiving a lump sum of $420 per child with their July Child Tax Benefit payment. This amount represents the additional $60 per month per child payable as of January 1, 2015.This is a great opportunity for families  who will be winning the UCCB lottery to invest the lump sum in an RESP or TFSA for maximum growth and tax savings.  

Enjoy the benefits of filing on time and online


Enjoy the benefits of filing on time and online - www.aliko-aapayrollservices.com/blog


Enjoy the benefits of filing on time and online
Did you know?





Filing your income tax and benefit return and paying what you owe on time helps you avoid possible interest and penalty charges, and ensures that your benefits won't be delayed.
Important facts
  • You have until midnight on or before April 30, 2015, to file your 2014 income tax and benefit return.
  • If you or your spouse or common-law partner is self-employed, you have until midnight on June 15, 2015, to file your return.
  • Any balance owing must be paid on or before April 30, 2015—even if your return is due on June 15, 2015.
What happens if I don't file on time?
When you file your yearly tax return, you are letting the Canada Revenue Agency (CRA) know your current tax situation. Without that information, the CRA can't be sure that you are still eligible to receive certain benefit payments. If you don't file on time, your benefit and credit payments (for example, the Canada child tax benefit and the goods and services tax/harmonized sales tax credit) may be interrupted.
Also, if you have a balance owing and you don't file your return on time, we'll charge you a late-filing penalty. The penalty is 5% of your 2014 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months. If we charged a late-filing penalty on your return for 2011, 2012, or 2013, your late-filing penalty for 2014 may be 10% of your 2014 balance owing, plus 2% of your 2014 balance owing for each full month that your return is late, to a maximum of 20 months.
In addition to the late-filing penalty, if you have a balance owing for 2014 you'll be charged compound daily interest beginning May 1, 2015, on any unpaid amounts owing for 2014.
Even if you can't pay all of your balance owing right away, you should still file your return on time. You can set-up a pre-authorized debit agreement using the My Account service, or call us at 1-888-863-8657 to make a payment arrangement. By filing on time, you'll avoid the late-filing penalty.
CRA online services make filing easier and getting your refund faster
The CRA's online services are fast, easy, and secure. You can use them to file your income tax and benefit return, make a payment, track your refund, receive your notice of assessment, and more. Did you know that the Government of Canada is switching to direct deposit for payments that it issues? This includes your tax refund and benefits payments? Sign up for direct deposit today! For more information, go to www.cra.gc.ca/getready
 
 

What mistakes are made when investing money


What mistakes are made when investing money- www.aliko-aapayrollservices.com/blog


What mistakes are made when investing money
 
Written by Wayne Rothe  
 
In two decades of helping people with their money, I’ve learned that most people – left to their own devices – make mistake after mistake. They do precisely the wrong thing at the worst time – zigging when they should be zagging. These errors crush people’s finances and scuttle their retirement dreams. A good financial planner can help but it doesn’t guarantee success either. Planners can only advise; our best advice sometimes goes unheeded.
Some people don’t like financial “guru” Suze Orman. She shoots from the hip and tells people the raw truth, which often hurts. I must say that I do like her common-sense advice. In her book The Money Class: How to Stand in Your Truth and Create the Future You Deserve, Orman admits that no one knows what the stock market will do this year, or next. Not Warren Buffett, not the best fund manager and not the smartest investment advisor.
Predicting markets is a fools game
During good markets I’ve had clients tell me I’m brilliant. I’m sure some also think I’m an idiot when markets are lousy and their investments are doing poorly. I’m neither a genius nor an idiot. I’m just a guy who knows how to build good portfolios, how to create a financial plan, how to stay on track, how to minimize taxes and – perhaps most importantly – and how to avoid the colossal investing mistakes that destroy retirement dreams.  the truth is I have no idea where the markets are going in the next year or two. I do think I have a pretty good idea where they’ll be in the next 10 years, which is the period you should be concerned about. That is, unless you’re within a few years of needing your money for retirement, or for some other purpose.
“Don’t worry if the market goes up or down,” Orman says. “Focus on building a diversified portfolio with a mix of stocks and bonds that will grow in value over the long term. Think decades, not quarters.”
Investing is important but not everything
Orman says that there are more important factors to your success than an investment’s rate of return.
“A financial planner can help you figure out an allocation strategy,” Orman contends, in other words the proper mix of stocks, bonds and cash to fit your goals. “That said, how much money you set aside is more important than how you invest it. You need to be putting away at least 10 to 15 per cent of your salary every year – around 25 per cent if you started saving in your 30s or 40s.”
That requires people to – wait for it – spend less and take on less debt. Orman writes. “I am going to challenge you not merely to live within your means, but to live below your means.”
Orman says that income from your savings plus government benefits should replace 70 to 80 per cent of your pre-retirement income. If you get a raise, invest half of it. Actually, I think that some people can manage fine on 50 to 60 per cent of their pre-retirement income.
The last thing I’ll highlight from Orman’s fine book is that if you’re not retiring or otherwise don’t your money in the next 10 years, a stock market decline is actually good news. You should be cheering for bad markets.
Orman invites you to imagine that there is a jacket you’ve had your eye and it’s discounted by 25 per cent. “Wouldn’t you be thrilled?” she asks. “You should feel the same way about stocks. When the price of an investment drops, your dollar buys more shares—and more shares will earn more money when the markets inevitably go back up.”
She’s saying what I have said many time – that a market downturn is an opportunity to buy into a rising tide at reduced prices. Learning this important fact should help you avoid investing mistakes and make you a more successful investor.
 
 

The Rule of 72



The Rule of 72- www.aliko-aapayrollservices.com/blogThe Rule of 72

Written by Sarah Milton

 

“Compound Interest is the eighth wonder of the world.” – Albert Einstein

 

 

Einstein described compound interest as the eighth wonder of the world because he felt that those who understood it, earned it and those who didn’t, paid it. Compounding is what makes saving early and saving regularly such a powerful part of building wealth and it’s also what makes it so hard to get out from under the mountain of consumer debt that so many of us accumulate. In an nutshell, compound interest is earning (or paying) interest on interest. When you earn interest at a compounded rate, your money grows faster because you are earning interest on your total balance (principle + interest) rather than on the principle alone. Similarly, when you pay interest at a compounded rate (as you do with credit cards) your interest charges grow much faster and your debt load gets larger.

We can see the power of compounding in the table below, which shows how $1000 earning 5% annual interest grows over time. The first column shows how the $1000 would grow earning 5% simple interest (earned on just the $1000 principle) and the second column shows how it would grow earning 5% interest compounded annually (earned on the principle + interest).

YEAR
5% SIMPLE INTEREST
5% COMPOUND INTEREST
5
$1,250
$1,276
10
$1,500
$1,629
15
$1,750
$2,079
20
$2,000
$2,653
25
$2,250
$3,386
30
$2,500
$4,322
35
$2,750
$5,516
40
$3,000
$7,040
45
$3,250
$8,985
50
$3,500
$11,467

The Rule of 72

The rule of 72 is a simple way to estimate how long it will take your money to double in value at a given interest rate. If you divide 72 by the annual interest rate, the answer is the number of years it will take to double. For example, 72 divided by 5 is 14.4. This means that, as you can see in the table above, it takes just under 15 years for $1,000 to become $2,000. 15 years later (in year 30) the money has doubled again to be just over $4,000 and, 15 years after that (in year 45) it has doubled again to become more than $8,000. In year 60, it will have doubled yet again and become $16,000. Using this rule, it’s clear to see that both time and interest rate are two key factors in building wealth. At 8% interest, your money will double in 9 years (72 divided by 8 = 9) but it will take 36 years to double earning 2% interest. For a 20 year old, $100 invested at 7% is worth $2,100 at age 65. For a 30 year old, that same $100 invested at the same rate is only worth $1,068 at age 65 and for a 40 year old, $100 invested at 7% is worth just $543 at age 65. This means that, at 40 years old, even though I’m only twice the age of the 20 year old, I have to save four times as much each year in order to achieve the same level of wealth at age 65. It’s a concept that I wish I had understood as a teenager because I’m pretty sure it would have motivated me to manage my money differently!

At the end of the day, saving is always a very personal decision: the choices we make about whether to save, where to save and how much to save, vary enormously from person to person. However, all too often, I hear people in their twenties saying that they’ll wait to save until they’re older because then they’ll be earning more. When you consider how powerful a factor time is in the wealth building equation, it just doesn’t make sense (especially when you consider that just because you’re earning more doesn’t mean you have more discretionary income). If you can do as much with $25 at 20 as you can do with $50 at 30 or with $100 at 40, it makes sense to start the saving habit early.

Even if you feel like you’ve “missed the boat” because you should have started saving years ago, remember that whatever you save today has a greater power to grow than money you save next month, next year or 3 years from now. We can’t change our past choices but we always have the power to choose to change our financial future by making different choices today.

 

 

 

Brush Up on Claiming Medical Expenses


Brush Up on Claiming Medical Expenses- www.aliko-aapayrollservices.com/blog

Brush Up on Claiming Medical Expenses
Claiming medical expenses can itself be painful: There are so many receipts and tiny numbers involved with making the claim!
 
Nonetheless it’s definitely worthwhile for taxpayers and their advisors to be aware of how they can save money in this area. Medical expenses themselves are common, yet most of us don’t know exactly what’s deductible, so there are lots of misses when claiming these common costs. Get ready for some “aha moments” as we look closely at claiming medical expenses. 

Most people know, for example, that they can claim medical expenses for their nuclear family: mom, dad and their minor children; but you can also claim for others who are dependent on you: children over 18, grandchildren, parents, grandparents, siblings, even uncles, aunts, nephews and nieces if they are resident in Canada.  

There are also a host of interesting costs that are deductible, provided they are unreimbursed by a medical plan. So, for example, if you are on a medical plan at work, and it covers 80% of all these costs, you can claim the 20% that is not covered by the plan.
Furthermore, the premiums for private medical plans are claimable too, including those provided by an employer. Check pay stubs and Box 40 of the T4 slip for the premiums in this case.
Generally, the costs of visiting the following medical practitioners are eligible:

• dentist or dental hygienist • medical doctor or practitioner
• optometrist • pharmacist
• psychologist or psychoanalyst • chiropractor
• naturopath • therapeutist or therapist
• physiotherapist • chiropodist (or podiatrist)
• acupuncturist • dietician
• nurse, including a practical nurse whose full-time occupation is nursing • audiologist
 
Eligible medical treatments include:
• medical and dental services, eyeglasses, hearing aids and their batteries • attendant or nursing home care
• ambulance fees • guide dogs or dogs to manage severe diabetes, including care and travel for training
• prescribed alterations to the home to accommodate disabled persons • cost of training a person to provide care for an infirm dependant
• lip reading or sign language training • tutoring services for a patient with a learning disability or mental impairment
• drugs and lab tests prescribed by a medical practitioner and recorded by a pharmacist • private health plan premiums, including group insurance premiums, Blue Cross premiums, and travel insurance costs
 
 

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).
 
 
 

Pay Yourself First

Pay Yourself First -www.aliko-aapayrollservices.com
 
 
 
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

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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.