The Penny Drops
The Canada Revenue Agency targets long-standing loopholes in the 2012 federal budget.
May 1, 2012 by Hank Bulmash
Just one provision of the 2012 Federal Budget made news around the world this spring. It was discussed in papers in New York, London, Berlin and Paris, and probably Tokyo and Beijing. While it is nice to know the world press thinks about us occasionally, the story they picked up was inconsequential. The Royal Canadian Mint made its last penny on May 3. This will save the government about $11 million a year (in terms of federal finances, that is not even a rounding error).
The lack of pennies will make our lives a little more complicated since prices will still be computed to the cent and then rounded to the nearest nickel. This is essentially what my local coffee shop does each time it sells a latte. We know the price will always be rounded up and so whatever savings the mint achieves will be lost to inflation and paid for by all of us. But this is a change that was inevitable and it has been delivered.
Now for more important stuff: a series of proposals that affect the taxation of companies and individuals.
There will be a limitation put on Employee Profit Sharing Plans (EPSPs) for specified employees. Specified employees are related to the employer or own at least 10 per cent of a class of shares of the employer. Until now, an employer could make an unlimited contribution to an EPSP on behalf of a specified employee. The new rules state that if the contribution exceeds 20 per cent of the employee’s salary, the contribution will be taxed at the maximum tax rate. This discourages family-owned companies from making large EPSP contributions on behalf of family members in low tax brackets.
Tax rules for RCAs (Retirement Compensation Arrangements) have also been altered. An RCA is an unregistered compensation arrangement allowed by the Income Tax Act. The continued existence of this vehicle is difficult to explain since RCA rules are extremely complex, and when used properly, an RCA is generally of little benefit to either the corporation or the retiring employee. For some time, however, RCAs have been used (with great creativity but varying success) as a tool in tax reduction schemes. Not surprisingly, the Canada Revenue Agency (CRA) hates that. As a consequence, the new rules succeed in making RCAs even less attractive than they were.
In an attempt to promote entry-level employment, the budget extended the hiring credit for small business. The credit is the difference between 2012 EI premiums and 2011 EI premiums up to a maximum of $1000, as long as the company’s 2011 premiums were less than $10 000. Offsetting this small incentive for growth, the budget has reduced some of the rates for Scientific Research and Experimental Development (SRED) grants – especially affected are corporations that are not Canadian-Controlled Private Corporations. There may be a suspicion in Ottawa that foreign-owned corporations have obtained SRED money for projects that will not ultimately aid Canadian innovation.
Rules for Registered Disability Savings Plans (RDSPs) have been simplified as part of an ongoing drive by the federal government to coordinate administration of these plans with the provinces. An RDSP is a savings vehicle aimed at helping people who have severe, prolonged mental or physical impairments. Individuals who are eligible for the disability amount under the Income Tax Act are also eligible to have an RDSP. Families can contribute to an RDSP on behalf of a family member.
Contributions to the plan are not tax deductible, but tax on income earned in the plan is deferred until the income is withdrawn. At that time, the disabled recipient is taxed (not the donor). Furthermore, there are government programs that provide additional funds for these plans. The plans may be eligible to receive Canada Disability Savings Grants up to a lifetime limit of $70 000 or payments from the Canada Disability Savings Bond program up to a lifetime maximum of $20 000. This vehicle is very much worth exploring for families of impaired persons.
There has been an interesting change in the taxation of the premiums of some insurance policies. First, some background. Many employers provide disability policies for employees. Those policies, sometimes called wage replacement plans, pay a monthly benefit to an employee who is unfit to return to work. These policies generally pay about two thirds of a person’s normal monthly salary, which is adequate since the payments are generally not taxable. The payments are not taxable as long as the employee has either paid the premiums out of his own funds or if the premiums the employer paid on his behalf are treated as a taxable benefit (the typical situation).
But there is a certain type of policy specifically designed to avoid taxable benefit treatment on premium payments – call it Plan B. A Plan B policy includes the payment of a lump sum (generally for a major medical condition), as well as the monthly benefit typical of wage replacement schemes. By combining a major illness policy with a disability benefit, the policies circumvented the taxable benefit rules. Unlike a normal major illness policy, premiums on these plans were tax deductible to the employer because they comply with rules allowing the deductibility of premiums. All in all, it is a very clever strategy but not acceptable to CRA. The 2012 budget allows the tax deductibility of premiums for these policies, but requires that the premium payment be considered a taxable benefit to the employee. Another loophole closed.
The tax changes in this budget are relatively minor. These are little things, some beneficial, some not – depending on your perspective, of course. The government has large financial issues to deal with, and it has found ways (both large and small) to reduce expenditures. Based on the evidence of this budget, the government does not plan to deal with its financial issues through major changes to our tax system. This is probably a good thing. <>
Hank Bulmash, MBA, CA, TEP, is senior partner with Bulmash Cullemore Chartered Accountants and is president of its consultant subsidiary BusinessLab Inc. E-mail Hank at firstname.lastname@example.org.