“These new rules have an impact on remuneration planning for owner-manager clients..”
Before January 1, 2012, an employer was not required to deduct CPP contributions from an employee’s pensionable earnings if the employee was 60 years of age or older, and provided proof that he or she was receiving a CPP or QPP retirement pension benefit.
This is no longer the case.
Effective January 1, 2012 employees and employers are required to contribute to CPP, even if the employee is receiving CPP or QPP pension income, if the employee is:
- 60 – 65 years of age; or
- 65– 70 years of age (and has not filed an election to stop paying CPP contributions); and
- The employee is “working” (engaged in pensionable employment or self-employment).
These new rules require an employer to deduct and remit CPP in 2012 for these employees, even where the employee was not contributing to CPP and was receiving CPP pension income. There is an exception where the employee has attained the age of 70 or otherwise elects out of contributing to CPP.
An election to opt out of contributing to CPP can be made in prescribed form (CPT30), when the employee is at least 65 years of age and is receiving a CPP or QPP retirement pension. The election takes effect on the first day of the month following the date that the employee provides a duly completed form CPT30 to the employer. The election applies to pensionable employment and self-employment earnings.
These new rules have an impact on remuneration planning for owner-manager clients. In some circumstances, it will make sense for the owner-manager to terminate the payment of salary from the corporation, and receive compensation entirely by way of dividends. By doing so, the owner-manager will be able to elect to receive CPP early (commencing at age 60), and eliminate the requirement for both the employee and employer paid portion of CPP. In many cases, it will make sense to elect out at age 65, in any event.
Circumstances will vary so proper planning should be obtained to determine the best tax strategy.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
