Author Segal LLP

Changes Coming to the Voluntary Disclosure Program

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Although it’s doubtful that anyone does so with any great degree of enthusiasm, each spring millions of Canadians sit down to prepare for the completion of their annual tax return or, more often, engage a professional accountant to do it for them.  Although the rate of compliance among Canadian taxpayers is very high — for the last filing season, just under 30 million individual income tax returns were filed with the Canada Revenue Agency (CRA) — there are, inevitably, those who do not.

There are a lot of reasons why individual Canadians don’t file their returns or pay their taxes on a timely basis, and almost all of them are based on a lack of understanding of how our tax system works, or on incorrect information about that system.

Some taxpayers don’t file because they believe that there’s no reason to do so if they don’t owe anything and aren’t expecting a refund. While that can be true, it’s also the case that it’s necessary to file to receive income-tested tax credits and benefits, including the HST credit, the Canada child benefit and a range of provincial tax credits. Those who don’t file can’t have their eligibility for such credits determined and so no credits can be paid to them. Others don’t file because they have a balance owing but don’t have the funds to pay that balance on filing. That, too, is the wrong approach, as anyone who owes taxes but doesn’t file a return by the filing deadline gets hit with an immediate penalty of at least 5% of the outstanding amount owed. In such circumstances, the right approach is to file on time and to contact the CRA to come to an agreement on a payment arrangement over time. Finally, there is a persistent (and completely false) tax myth that has been circulating for decades, that the federal government does not have the legal right to collect taxes and every year some taxpayers fall victim to someone peddling that myth.

There are also some Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed. While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each instance of non-compliance simply aren’t available, especially since, in many cases, the amount recovered may be less than cost of recovering it.

With all of that in mind, several years ago the CRA instituted a program intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arose from the fact that, in most cases, such taxpayers would have to pay outstanding tax amounts owed, plus interest, but would avoid the payment of penalties and the risk of criminal prosecution.

That program, the Voluntary Disclosure Program, has generally fulfilled its objectives but has been a target for criticism as being a means by which those who engage in deliberate tax avoidance can escape the consequences of their actions. The CRA recently announced that changes would be made to the Voluntary Disclosure Program, beginning on March 1, 2018, and that those changes would narrow the eligibility criteria for the program and impose additional conditions on participants, to avoid such effects.

To start, the basic requirements for participation in the VDP as of March 1, 2018 include the following. To qualify for relief, an application must:

  • Be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
  • Be complete;
  • Involve the application or potential application of a penalty and, for GST/HST application, the application or potential application of a penalty or interest; and
  • Include information that is at least one year past due for income tax applications and, for GST/HST applications, at least one reporting period past due.

The basic change which will come into effect after February 2018 is that two tracks will be created for income tax disclosures — the Limited Program and the General Program.  The determination of whether an application should proceed under the Limited or the General Program will be made on a case-by-case basis. The intention, however, is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

  • the dollar amounts involved;
  • the number of years of non-compliance; and
  • the sophistication of the taxpayer.

Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged, and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of returns required to be filed.

There are, as well, other changes to the administration of the Voluntary Disclosure Program. The most important of those, from a taxpayer’s point of view, are the following.

As of March 1, 2018, taxpayers who make an application under the VDP must pay the estimated taxes owing as a condition of qualifying for the Program. Where the taxpayer is financially unable to do so, he or she can request that the CRA consider a payment arrangement. Formerly, there was no requirement to pay outstanding taxes owed as a condition of participating in the VDP.

As well, taxpayers could formerly “test the waters” with respect to making a voluntary disclosure by making an anonymous (termed a “no-names disclosure”) disclosure and receiving an opinion on the likely outcome. That option will be discontinued after February 2018 and replaced by a “pre-disclosure discussion” service. That new service will still allow a taxpayer to discuss his or her tax affairs with a representative of the CRA on an anonymous basis, but such discussion will not constitute acceptance into the VDP.

Income Sprinkling Draft Legislation – December 13, 2017

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On November 21, 2017 Segal LLP prepared an update on the tax proposals based on a series of news releases provided by the Liberal government. On December 13, 2017 the government finally provided new draft legislation for the dividend / income sprinkling rules. The purpose of this article is to provide an overview of the new proposed legislation.

These rules will all apply as of January 1, 2018. However, certain rules with regard to share ownership will apply as of December 31, 2018. This means that, in certain situations, there may be ownership planning steps to be undertaken between now and the end of 2018

The general principal is still that any adult family member that is inactive will pay the top rate of tax on split income (TOSI). Split Income includes the following sources:

  1. Private company dividends
  2. Any income inclusion because of section 15 (shareholder benefits)
  3. Partnership Income
  4. Trust Income
  5. Interest Income on Debt- New
  6. Income or Capital Gains on Disposition of Property- New

Fortunately, the government has removed the proposal to apply TOSI to income on income – secondary income. As well, family will no longer include aunts, uncles, nieces and nephews in considering the source of the income.

The TOSI will not be applied to several new circumstances not previously addressed in the old proposals:

  • Income on property transferred on a marriage breakdown
  • Taxable capital gain on the disposition of qualified farm or fishing property or qualified small business corporation shares (QSBC). This means that keeping a corporation qualified as a QSBC ensures that the ultimate sale of the shares will not result in TOSI. This applies even if the Capital Gains Exemption is not actually claimed.
  • Income or Gains on property inherited where there was no TOSI to the person who bequeathed the property

One of the key differences to the new proposals is that individuals within specific age ranges are treated differently:

  • Under 18 years old- no change to rules
  • Over 17 years old but under 25 years old
  • Over 24 years old
  • Over 64 years old

1. Income for those 65 years of age or older.

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There is a new rule that a shareholder can receive dividend income or incur a taxable capital gain, that would otherwise have been subject to TOSI, and the income or capital gain would be subject graduated tax rates if the shareholder’s spouse is 65 years or older and the shareholder’s spouse was an active shareholder in that corporation.

These rules appear to be aimed at critics who stated that it is unfair that a senior can split income on pensions but can’t receive dividend income from a corporation.

2. Over 17 years old but under 25 years old

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a. Income earned from a “related business” is subject to TOSI.  Related business is generally defined to be a company where a related person owns 10% or more. Where the income is from a partnership, a related person need only be a partner.  The percentage ownership or allocation of a partnership is not relevant.

b. Income earned from an “excluded business” is NOT subject to TOSI. An excluded business is defined to be a business where the individual taxpayer works on a “regular, continuous and substantial basis in the year” or for five previous years.  The Department of Finance has given some guidance that this would mean working an average of 20 hours per week “during the portion of the year in which the business operates”. This means that if the family member works in the business in the year, then TOSI would not apply to dividends in that year. Moreover, if the family member worked in the business for any five previous years (doesn’t have to be consecutively), the family member will never be subject to TOSI on the income paid from that business. How a person would prove they worked 20 hours a week is unclear. For example, if a daughter worked full time in a business from ages 20 to 25 years old, she could receive dividends, for the rest of her life, and not be subject to TOSI.

c. There is a new concept called “safe harbor capital return”. This allows a child in the above age range, to lend funds to the company and earn a rate of return at the prescribed rate (currently 1%) that is not subject to TOSI. There are no rules as to the source of these funds. That is, a father could lend funds to a child (18-24 years old) to make this loan.

d. The last exclusion is what the proposed rules call “a reasonable return” having regard to “arm’s length capital” of the individual. This would allow an individual who has accumulated funds on their own to advance funds to the corporation and earn a reasonable return based on the following:

  1. Work performed
  2. Property contributed
  3. Risks assumed
  4. Consideration of other amounts paid to the individual
  5. “other factors”

The funds advanced cannot be from a related party, cannot be borrowed and cannot be from income distributed by a company owned by family members. Though this is meant to be a relieving provision, there are very few circumstances where an 18-24 year-old has accumulated their own funds to lend to their parent’s corporation.

3. Over 24 years old

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For those family members over 24 years old, the rules related to a “related business” and “excluded business”, noted above in the 18-24 age range, will also apply. That is, if there is income from a related business it is subject to TOSI. If there is income from an excluded business, there will not be TOSI.

For this age group there are two additional exclusions from TOSI:

  1. Income or Taxable Gain from “Excluded Shares”.
  2. A “reasonable return” in respected of the individual.

a. Income or Taxable Gain from “Excluded Shares”

Excluded shares are a new definition. They have nothing to do with excluded business, but they are part of the definition of excluded amount.

Excluded shares are defined as a corporation that is owned by the taxpayer where the following conditions are met:

  1. It is NOT a professional corporation.
  2. Less than 90% of the business income from the most recent fiscal year is from the provision of services.

If these two tests are met, the next test is whether the individual taxpayer owns 10% or more of the votes and 10% or more of the value of the company.

Lastly, 90% of the income of the corporation must NOT come from other related businesses. There are many issues in this definition.

  • What is business income from the provision of services?
  • Is it a profit test or a revenue test?
  • What is service income? The only definition in the Income Tax Act for service income is for calculating foreign accrual property income – it would not be practical in this context. We are back to dealing with subjective analysis. This is something the government had suggested it was trying to avoid.
  • What if someone sells product and provides service?
  • How does a company track the allocation of that income if it is tied together?

It appears that the taxpayer must own these shares directly in order to fit into the exclusion. Therefore, to own these shares through a trust would not work. If the excluded share test is not met, TOSI could still be avoided through the excluded business test (discussed above) or reasonable return test (discussed below).

This ownership test (10% of votes and 10% of value) must be met by December 31, 2018 in order to apply for the full 2018 year and onwards. This provides time for taxpayers to change their ownership to give family members, who are older than 24, ownership of 10% of the votes and value. In those situations where a freeze has been done in the past, there could be challenges with transferring 10% of the value on a tax-free basis. Any transactions between parents and children are at fair market value. There are opportunities to transfer frozen shares to a spouse tax free. However, the attribution rules will attribute back any income or gains from the transfer unless the spouse pays fair market value for the shares. This would include an actual cash payment or a note payable with the prescribed interest rate whereby the interest is paid by January 30th after each year. Bottom line, it’s complicated and will only be available in very specific situations.

b. A “reasonable return” in respect of the individual

This is the second test. This test has nothing to do with the first test. That is, a family member can still receive income that is not subject to TOSI if this test is met. This is similar to the test noted above in that the amount paid to the individual that is reasonable having regard to the following factors relating to the relative contributions of the taxpayer.

  1. Work performed
  2. Property contributed
  3. Risks assumed
  4. Consideration of other amounts paid to the individual
  5. “other factors”

One big difference from before is that this is no longer an arm’s length analysis. It is an analysis of the relative contribution of the individual. The problem is how does one determine an appropriate amount. It is all subjective (again). The government has added in “other factors” to be considered. At first blush, one would think that this allows taxpayers some leeway with regard to justifying contributions. However, this could be of advantage to CRA when they make their determination of a reasonable amount. That is, they could consider other factors that support their claim that the amount being paid is not reasonable.

Capital Gains

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Capital gains on the sale of shares or fishing properties that qualify for the Lifetime Capital Gains Exemption (LCGE) are not subject to TOSI. It is not dependent on claiming the LCGE, only that the LCGE could be claimed. In brief terms, the LCGE is available for shares of Canadian Controlled Private Corporations (CCPC) where 90% of the corporate assets are active Canadian business assets at the determination time and 50% of the assets were active Canadian business assets in the preceding 24 months before the determination time.

Where there are gains on shares that don’t qualify for the LCGE, the tax treatment depends on whether the vendor is over 17 years old or under 18 years old. Where the vendor, directly, or through a trust, is over 18 years old, the gain is subject to TOSI and taxed at the top rates. Where the vendor is under 18 years old, the gain is treated as dividend and subject to TOSI at the top rate. The dividend is 100% of the gain and not 50%.

Clearly, it becomes very important to ensure that shares in a CCPC qualify for the LCGE. This means ensuring that non business assets do not accumulate in the company.

Summary

In summary, the government has attempted to give a few more situations where TOSI won’t apply. Specifically, to seniors and family members who have worked in the business for a period of time. However, there are still very few situations where a family member would fit into one of the exclusions. The rules are still very complicated and open to subjective determinations. Determining a “reasonable return” will likely take many court cases until there is clearer guidance to both tax practitioners and taxpayers. This is the beginning of the process.

It is important that you speak to your Segal LLP advisor to determine how these rules affect you and if there are any planning opportunities or changes required in 2018.

Update on July 18, 2017 Tax Proposals

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The last few months have been a very tumultuous time for Canadian tax practitioners and taxpayers. Proposals were made by the federal Liberal government on July 18, 2017 that had some of the most significant changes to the taxation of Canadian private corporations since the early 1970’s.

The government promoted these changes as “tweaks”, however, as details emerged, they revealed themselves as fundamental changes to how income was taxed for private corporations. There was a dramatic and strong negative reaction to these proposals from tax practitioners, taxpayers and the business community. In response to the mounting concerns directed to Finance Minister Bill Morneau’s proposals, the government has since made pronouncements by news release that will adjust the original proposals.

The original proposals from July 18th, 2017 are summarized below with updates from the most recent news releases from the federal government including discussion of those that are still on the table. For clarity – there has been no new draft legislation since the July 18, 2017 proposals. There remains a great deal of uncertainty as to what the actual rules will be as of January 1, 2018.

The July 18 amendments can be summarized under the following headings:

  1. Multiplication of capital gains exemption;
  2. Conversion of income into capital gains;
  3. Dividends / income sprinkling;
  4. Taxation of passive income.

Multiplication of Capital Gains Exemption

In the initial proposals, there were rules that would eliminate the ability for family members to claim the capital gains exemption on shares of a private corporation where those family members were not active in the business. By way of news release, these proposed rules have been removed.

Conversion of Income into Capital Gains

There were a number of rules that proposed to re-characterize capital gains into income. As well, they affected the ability to pay out a capital dividend account when assets were sold to a related corporation.  Both of these proposed rules have been removed by way of news release.

Dividend/Income Sprinkling

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These rules are some of the most detailed and far ranging rules that we have ever seen.

The goal of these rules is to tax family members at the highest marginal tax rate on dividends or income received from certain private corporations. In the past, dividends to minors were taxed at the highest tax rate. The new proposals are to tax family members up to 24 years old as well as all family members who have not worked in the business or contributed capital to the business.

These new rules propose a “reasonableness” test to determine if the amounts paid to the family members should be taxed at the highest tax rate or not. This concept is called tax on split income (“TOSI”).

If an individual is subject to the TOSI then that individual will pay tax at the highest marginal tax rate and will not be allowed any deductions against that income.

Previously, this tax was only applied to dividends, shareholder benefits, and certain partnership and trust income. The rules are now being expanded to include income from loans to certain corporations, partnerships and trusts and the disposition of shares in private corporations. Moreover, there is now a proposal to tax investment income earned on the initial income that was taxed at the highest tax rate. That is, if an individual earned $100 and was taxed at the highest tax rate and then invested that $100, the income earned on that investment would still be subject to the TOSI rules and be taxed at the highest marginal tax rate.

The notion of reasonability is being proposed to include all sources of income from the corporation to determine if the dividend income or interest income would be reasonable with regard to the entire remuneration. This obviously is very subjective and we have many concerns about how these rules would be applied.

In the draft legislation, these rules were to be effective January 1, 2018. As a result, we are suggesting that clients consider paying larger than usual dividends to any family member that is over 18 years old in order to maximize the funds available to the family members as of December 31, 2017. The actual amount of dividends should be determined in consultation with your Segal tax advisor.

Taxation of Passive Income

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In the past, an active business could accumulate funds after paying corporate tax and invest those funds in whatever manner decided upon by the shareholders. The new rules are proposing to set a limit on the amount of investment income that can be earned using active business income. At present, the government has proposed a $50,000 annual limit. It must be stressed, that there has been no draft legislation on this matter. As well, the government has indicated that they will table the draft legislation in their 2018 budget. The date of this is unknown.

The general concept is that the income on any assets owned before the rules come out would not be subject to these new rules. At this point, there is no clarity from the government on what the cutoff time will be. We are suggesting that clients maximize their retained earnings and assets as of December 31, 2017 to maximize the amount of investment income that can be earned on these assets in the future. This suggestion is in contradiction to the suggestion above of paying larger than normal dividends to family members. An analysis must be done to determine what the actual dividends should be and what the maximum amount of assets that should be retained in the corporation.

The details of how the income will be taxed are not available. The general idea is that if capital has been injected into the company from personal assets, then these rules would not apply. However, if the capital to invest in the business has been accumulated because the company or its subsidiaries engaged in an active business then these rules will apply.

The proposed rules would be that there is a tax of approximately 50% in the corporation and then full personal dividend tax upon payment out of the corporation. The difference between the proposed rules and the current rules is that under the current rules, the corporation would get a refund of a portion of the corporate taxes paid when dividends are paid. The net effect is that an individual taxpayer would be indifferent to earning investment income in a corporation versus personally. Each province has different tax rates and therefore there is not perfect integration. However, under the new rules the effective tax rate in Ontario, would go from 56% to 73% when considering the corporate and personal taxes.

Given the extremely high tax rate noted above, there has been a significant response to the government about changing these rules. However, there is currently no draft legislation and there is no effective date.

As of now we are waiting for the rules on dividend/income splitting in “the fall” from the government. The passive income rules may not be released until March or April 2018.

Other Changes

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The federal and the Ontario government have both announced corporate tax rate reductions for small business corporations. The Ontario rate will decrease by 1%, effective January 1, 2018. The federal rate will decrease by 0.5% effective January 1, 2018 and by an additional 1% effective January 1, 2019. Although these tax cuts will benefit small business corporations, they will have a detrimental effect to the shareholders. To maintain integration, there will be a corresponding increase in the personal tax rates on dividend income. Consequently, individual shareholders receiving dividends after 2017 will be facing a higher personal tax rate.

Protecting your personal financial information – the Equifax cyberattack

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News about another successful cyberattack, on government or on a private company, in a single country or worldwide, is now almost routine. What such events usually have in common is a desire by the hackers who perpetrate the attacks to profit by it — either by demanding payment from the entity whose systems have been compromised, or by obtaining confidential personal information about individuals, which the hackers can then use fraudulently or sell to others who wish to do so.

In September of this year, the credit reporting firm Equifax announced that it had been subject to such a successful cyberattack, and that attack was especially concerning, both because of the nature of the information Equifax holds.

Most Canadian adults have used credit at one time or another. Whenever an individual obtains and uses credit — whether through a credit card, line of credit, car loan, or otherwise, the financial institution which provided the credit provides information about that credit use to a credit reporting agency like Equifax. The information provided includes the original amount of the debt, the payment history, whether any payments were made late, and the current balance. The file held by the credit reporting agency also includes personal identifying information about the individual, which can include the individual’s social insurance number (SIN). Such information is accumulated throughout the individual’s financial life and is used by credit-granting institutions to assess an individual’s creditworthiness whenever he or she makes an application for credit.

It’s readily apparent that credit rating agencies have a great deal of personal and financial information about individuals and it was that information which was compromised in the cyberattack on Equifax which took place between mid-May and July 2017. Equifax has confirmed that personal and financial information of about 100,000 Canadians had been accessed in the cyberattack. (That number is subject to change and increase, as the investigation continues.) The information accessed included individuals’ names, addresses, credit card numbers, and – most ominously – SINs.

Equifax has committed to contacting, by mail (not e-mail or phone), the 100,000 Canadians whose personal information has been compromised. It will also be providing such individuals with credit monitoring and identity theft protection for a period of 12 months, at no charge. Individuals who are not contacted but have questions can contact Equifax at 1-866-699-5712 or by email at EquifaxCanadaInquiry@equifax.com.

Anyone whose personal and financial information is stolen, whatever the circumstances, has good reason to be concerned. And, given the number of instances in which Canadians routinely provide such personal and financial information, online or otherwise, the chances of being affected by an information security breach continue to increase.

As a practical matter, there is really nothing individual Canadians can do to ensure that companies, institutions and governments which have and hold their personal information are not subject to a cyberattack or other information breach. What Canadians can (and should) do is to restrict the personal and financial information which they provide to others to that which is required by law or absolutely necessary in the particular circumstances. And there are a number of steps which individuals can take to protect the personal identifying and financial information which they do disclose, and so minimize the risks that such information will misused or that they will become victims of identity theft.

Perhaps the most important of those steps is the need to protect one’s SIN. Having someone else’s SIN can give an unauthorized person significant access to additional information about that person, and can even allow them to impersonate that person, especially online, where bona fides can often be established simply by providing requested personal identifying information.

The circumstances in which Canadians are legally required to provide their SIN are relatively few. We need to include on the annual tax return, we must provide to financial institutions where the individual holds an interest-bearing account, a registered retirement savings plan, a registered education savings plan, or a tax-free savings account. There are not many other instances in which providing one’s SIN is required.

Online shopping is now ubiquitous and, of course, purchasing anything online requires an individual to provide a method of payment, which is usually a credit card number. The major online shopping sites have security protocols in place, but the reality is that providing one’s credit card number online will always carry a risk. There are ways to minimize that risk. Individuals who shop online on a regular basis might consider obtaining a credit card which is used only for online shopping, and which has a relatively low credit limit.

For those who wish to obtain personal information about someone else for fraudulent purposes, all forms of social media are, of course, a gold mine. Everyone has heard of the need to exercise caution with respect to the personal information disclosed on social media. What many don’t recognize is the need to consider the totality of information that is being “shared” on all social media platforms in the aggregate, not just on a single site like Facebook, Twitter, or Instagram, or in a single post on any of those sites. Anyone seeking to collect personal information about an individual for identity theft or other fraudulent purposes will certainly put together information from all available sources. And, while a single piece of information disclosed in passing, or in isolation, may not seem to pose a risk, it doesn’t take much information to create that risk. For instance, no one would post their bank account number on social media. But, someone who posts on Facebook about their frustration with a particular interaction with their (named) financial institution has created an opportunity for someone to approach them (weeks or months later) with fraudulent intent, purporting to be from that financial institution and asking them, for instance, to confirm their bank account number as part of the bank’s regular fraud prevention program. And too often, recipients of such approaches don’t consider that the caller might have obtained information about who they bank with from a months-old social media post. Such fraudulent approaches rely on the fact that most recipients don’t think to verify the authenticity of the call or the caller.

Not disclosing one’s SIN unless legally required to do so, and taking care when online shopping or in posting on social media are only some of the precautions which can be taken to protect one’s personal information. There are many others, and there’s a lot of information available on how to protect yourself and what to do if your personal or financial information falls into the wrong hands. The following websites are a good place to start:
www.rcmp-grc.gc.ca/scams-fraudes/id-theft-vol-eng.htm and https://www.getcybersafe.gc.ca/cnt/prtct-yrslf/prtctn-dntty/index-eng.aspx

 

Disclaimer

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact your Segal advisor at 416-391-4499 for more information on these subjects and how they pertain to your specific tax or financial situation.

Deciding when to start receiving Old Age Security benefits

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The baby boom generation, which is now in or near retirement, has always been able to factor receiving Old Age Security benefits, once they turn 65, into their retirement income plans. While receipt of such benefits can be still be assumed by the majority of Canadian retirees, the age at which such income will commence is no longer a fixed number. Retirees are now faced with a choice about when they want those benefits to start. For the past four years, Canadians have had the option of deferring receipt of their Old Age Security benefits, for months or for years past the age of 65, and that election to defer continues to be available. The difficulty that can arise is how to determine, on an individual basis, whether it makes sense to defer receipt of OAS benefits and, if so, for how long. It’s a consequential choice and decision, since any election made to defer is irrevocable.

Under the rules now in place, Canadians who are eligible to receive OAS benefits can defer receipt of those benefits for up to five years, when they turn 70 years of age. For each month that an individual Canadian defers receipt of those benefits, the amount of benefit eventually received would increase by 0.6%. The longer the period of deferral, the greater the amount of monthly benefit eventually received. Where receipt of OAS benefits is deferred for a full 5 years, until age 70, the monthly benefit received is increased by 36%.

The decision of whether to defer receipt of OAS benefits and for how long is very much an individual one — there really aren’t any “one size fits all” rules. There are, however, some general considerations which are common to most taxpayers:

  • The first consideration in determining when to begin receiving OAS benefits is how much total income will be required, at the age of 65 by determining what other sources of income are available to meet those needs, both currently and in the future.  Once income needs and sources and the possible timing of each is clear, it’s necessary to consider the income tax implications of the structuring and timing of those sources of income.  Taxpayers need to be aware of the following income tax thresholds and cut-offs.
    • Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 20.5%. For 2017, that second income tax bracket begins when taxable income reaches $45,916.
    • The Canadian tax system provides (for 2017) a non-refundable tax credit of $7,225 for taxpayers who are over the age of 65 at the end of the tax year. That amount of that credit is reduced once the taxpayer’s net income for the year exceeds $36,430, and disappears entirely for taxpayers with net income over $84,597.
    • Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2017, the full credit is payable to individual taxpayers whose family net income is less than $36,429.
    • Taxpayers who receive Old Age Security benefits and have income over a specified amount are required to repay a portion of those benefits, through a mechanism known as the “OAS recovery tax”, or clawback.   For the July 2017 to June 2018 benefit period, taxpayers whose income for 2016 was more than $73,756 will have a portion of their OAS benefit entitlement “clawed-back”. OAS entitlement for that time period is entirely eliminated where taxpayer income for 2016 was more than $119,615.

The goal is to ensure sufficient income to finance a comfortable lifestyle while at the same time minimizing both the tax bite and the potential loss of tax credits, or the need to repay OAS benefits received. Taxpayers who are trying to decide when to begin receiving OAS benefits could, depending on their circumstances, be affected by one or more of the following considerations.

  • What other sources of income are currently available?
  • Is the taxpayer eligible for Canada Pension Plan retirement benefits, and at what age will those benefits commence?
  • Does the taxpayer have private retirement savings through an RRSP?

Finally, not all the factors in deciding how to structure retirement income are based on purely financial and tax considerations. There are other, more personal issues and choices which come into play. Those include the state of one’s health at age 65 and the consequent implications for longevity, which might argue for accelerating receipt of any available income. Conversely, individuals who have a family history of longevity and who plan to continue working for as long as they can may be better off deferring receipt of retirement income where such deferral is possible.

Many Canadians put off plans, like a desire to travel, until their retirement years. Realistically, from a health standpoint, such plans are more likely to be possible earlier rather than later in retirement. The early years of retirement are usually the most active ones, and consequently are the years in which expenses for activities are likely to be highest. Having plans for significant expenditures in the early retirement years might argue for accelerating income into those years, when it can be used to make those plans a reality.

The ability to defer receipt of OAS benefits does provide Canadians with more flexibility when it comes to structuring retirement income. The price of that flexibility is increased complexity, particularly where, as is the case for most retirees, multiple sources of income and the timing of each of those income sources must be considered, and none can be considered in isolation from the others.

Individuals who are facing that decision-making process will find some assistance on the Service Canada website. That website provides a Retirement Income Calculator, which, based on information input by the user, will calculate the amount of OAS which would be payable at different ages. The calculator will also determine, based on current RRSP savings, the monthly income amount which those RRSP funds will provide during retirement. Finally, taxpayers who have a Canada Pension Plan Statement of Contributions which outlines their CPP entitlement at age 65 will be able to determine the monthly benefit which would be payable where CPP retirement benefits commence at different ages between 60 and 70.

The Retirement Income Calculator can be found at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html