Recent Changes To
Canada Revenue Agency Policies
Over the years we have met with many of you to discuss setting up and administering your Employee Profit Sharing Plans and at that time, we confirmed to you that as developments with CRA took place we would provide you with updates.
We wish to provide you with information that you should be aware of so that you can adjust your administration of your EPSP.
FIRSTLY, we were recently provided a copy of the attached letter detailing a policy change that CRA is now enforcing with financial penalties being levied against those who do not follow the policy.
Many business owners don’t include in their monthly employee remittances the tax withholdings that are attributable to their own salaries. Rather, such tax remittances are being made through their personal tax instalment payments. In making such tax instalment payments, the business owner was able to:
- preserve the cash flow of the business;
- determine at the end of the year how much of their own remuneration was attributed to salary, bonuses, profit sharing or dividends; and
- adjust their Canada Pension Plan liability.
With the change in the CRA policy outlined in the attached letter, EVERY business owner MUST remit the tax attributed to their own salaries or bonuses at the time that remittances are made for all of their other employees. From the perspective of the Canadian Taxpayer, this policy change is positive because it limits/prevents the Federal Government from becoming creditors of business owners whose businesses have failed and who subsequently become bankrupt and, by extension, allows the Federal Government to limit losses contributing to our national debt.
However, from the perspective of a business owner who pays all of his/her own personal taxes at year end and/or through their instalment remittances, this is not good news because (at a minimum):
- the tax on the business owner’s own remuneration is due monthly regardless of the business’ cash flow position;
- the business owner has to declare on a monthly basis whether his/her own draw is salary or a bonus (with a tax remittance due at that time) or a dividend (with the resulting tax paid via instalments and/or along with their tax returns); and
- the Canada Pension Plan remittances have to be determined and paid on a monthly basis on the business owner’s salary or bonuses.
For those of you that have regular employees and make monthly employee remittances AND are actively using your Employee Profit Sharing Plan in the manner we discussed where you are paying yourself a monthly “salary” of about $500 per month through your payroll account, please include in your business’ monthly employee remittances the tax and CPP component attributed to you (and your spouse if he/she is a beneficiary under your EPSP) on the $500 amount. If you don’t include those payments in your monthly remittance, you may be caught in the new CRA policy and be subject to the penalties identified in the attached letter.
SECONDLY, we have reviewed the changes to CPP that will take effect in 2012. These changes will have an impact on individuals that are between 60 and 65 years of age who want to semi-retire and begin to collect on their monthly CPP Benefits.
Under the existing system, anyone can start to collect on their CPP Benefits once they turn 60. In receiving these benefits however before the individual is 65 will result in a reduction of their CPP Benefit entitlement of 0.6% per month for every month that the individual is under the age of 65. This year’s monthly maximum CPP Benefit is $940, so if the individual opts out of CPP and begins to collect their CPP Benefits at that time, their monthly benefit will be reduced to $695 (for a total of $41,700 (pre-tax) over the 5 year period).
In 2012, however, if the individual wants to continue to work, the individual must continue to remit CPP Premiums. Assuming that the individual earns approximately $50,000 per year in semi-retirement, the individual will continue to pay at least $4,500 per year (or $22,500 over the 5 year period or, put another way, these payments equal 54% of the reduced monthly CPP Benefits the individual would receive on a pre-tax basis), with these premiums going toward a new program referred to as the Post-Retirement Benefit (the terms of which are not yet available).
The good news for those of you still using your Employee Profit Sharing Plan is that these two changes will have very little effect on you and your tax/CPP position as you will continue to enjoy the savings and flexibility offered under the EPSP because:
- If your “salary” component continues to be a nominal amount, your requirement to remit your taxes through your employee remittances is unlikely to cause any impact on your cash flow;
- You can continue to use the Trust to limit your CPP liabilities;
- You can continue to use the Trust to legally split income with your spouse if he/she is a designated beneficiary under your EPSP;
- For those of you looking to semi-retire at 60, your CPP liability continues to be nominal (which I roughly calculate to be less than a combined $1,500 amount over the same 5 year period); and
- There are no amendments or filings required to have your EPSP continue to comply with the provisions of the Income Tax Act.