_ Starting on January 1, 2012 there are significant changes to the Canada Pension Plan (CPP).

 
A smaller pension if you retire early

The retirement age remains at 65.  Until now anyone who had reached the age of 60 and had ceased, or significantly reduced, their employment for two months could start drawing a pension from the CPP.  The pension they received was reduced by 0.5% for each month before the age of 65.  A person who started drawing their CPP at exactly aged 60 would have their pension reduced by 30%.

Between 2012 and 2016 the  reduction will increase to 0.6% per month so that someone drawing their CPP at age 60 will have their pension reduced by 36%.  It will no longer be necessary to cease work for two months in order to qualify for a pension.

 
A larger pension if you retire later

Under the old system a CPP pension was increased by 0.5% for each month the pensioner delayed drawing their pension after 65 and up to 70 years old.  Under the new system the pension will be increased by 0.6% then 0.7%.  By delaying drawing a pension until age 70 a pensioner can have their pension increased by up to 42% instead of 30% under the old system.

 
CPP contributions

Another significant change is CPP contributions.  Under the old system a pension receiving a CPP pension did not pay CPP contributions even if the returned to pensionable employment or self-employment.  The new rule is that all people in pensionable employment (or self-employment) under the age of 65 must pay CPP contributions.  Between the ages of 65 and 70 a person can chose to opt out of paying CPP contributions. 

An employee opts out by completing form CPT30 and sending this to the Canada Revenue Agency.  They must give a copy of the form to their employer(s). 

A self-employed worker opts out by completing schedule 8 on their tax return for the year.

Note that a pensioner cannot opt out retrospectively so an employee must file their option in the month before they wish to opt out.  It will be possible to revoke a decision to opt out in a subsequent year.

 
Increased pension as a result of additional CPP contributions

As noted above, a person who draws their pension at aged 60 will have the amount reduced by 36%.  However, if they carry on working they will continue to pay CPP contributions.  Therefore, each year the amount of pension they receive will be recalculated.   The 0.6% per month “reduction” will be reduced to reflect the additional months of  CPP paid.  This recalculation will be done for each year the pensioner pays CPP contributions.

 
Employers

Employers are responsible for deducting and remitting the correct amount of CPP premiums.  Therefore they should ensure:

·         1    They know their employee’s dates of birth.

·         2    Ask for proof if an employee says they are receiving a CPP (or QPP) retirement pension

·         3    Ask an employee over 65 if they have filed an election to stop contributing to the CPP and, if so, get a copy of the election.


Existing CPP pensions

Anyone who started drawing their CPP pension before December 31, 2010 will be unaffected by these changes.  However, pensions started in 2011 will be subject to the above rules.
 

Conclusion

The decision on when to start drawing a CPP pension will now need careful and individual consideration.

For accounting periods starting from January 1, 2011 Canadian Generally Accepted Accounting Principles (GAAP) have ceased to exist.

Public companies

From 2011 public companies are required to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS).

This change recognizes that Canada is an international trading nation that seeks capital investment from around the world.   IFRS are becoming the de facto international accounting standards.   Overseas investors will be confident in reading the financial statements of Canadian companies, and Canadian investors can directly compare the performance of Canadian companies against their overseas competitors.

The main hold-out against the move to IFRS is the United States of America.  However, even though the US is reluctant to give up its power to set US accounting standards, it is working on aligning many of its standards with IFRS.  I believe that the US will end up with accounting standards that are only distinguishable from IFRS by their name.

Private Companies

While the change to IFRS is good for public companies and capital markets what does it do for small and medium sized companies (SMEs) that don’t need to raise funds from the public?  Nothing much, except to increase the cost and complexity of producing financial statements.   The owners of SMEs are generally involved in the day to day management of their businesses and don’t need the 70 to 100 pages of disclosures and discussion typically found in a public company’s financial statements.

Therefore the Accounting Standards Board has introduced a separate set of standards for use by private businesses.  These are the Accounting Standards for Private Enterprises (ASPE).  ASPE are based on the old Canadian GAAP but contain many of the simplifications for private companies that were optional under the old standards.  Of greatest relief to accountants across the country is the simplification of reporting on financial instruments.  Except where fair values are readily available (such as shares traded on the TSX) financial instruments will be reported at amortized cost.

Some of my clients decided to adopt ASPE early.  My experience is that for companies that used the options for private enterprises in the old GAAP the change has been easy to manage and comparative figures from earlier years have needed little adjustment.

Micro companies

The majority of businesses in Canada are micro companies.  These are companies that are owned by a few shareholders, have relatively small revenues and do not have significant amounts of debt.  These companies do not produce financial statements that comply with any accounting standards.  I don’t see this changing in the future.  Nonetheless, their external accountant makes a brief assessment of whether their financial statements are false or could be misleading.  ASPE will be the foundation of this assessment.

The day you become tax resident in Canada (see http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html) is the base date for the valuation of any foreign assets you hold.  Assets such as foreign real estate, bank deposits, and securities are valued at their fair market value on that day and this is converted into Canadian dollars using the then current exchange rate.  Historic exchange rates can be found on the Bank of Canada website http://www.bank-banque-canada.ca/en/rates/exchform.html. This has nothing to do with the actual cost to you. It is a reflection of the value as if you had disposed of, and repurchased, the assets immediately prior to landing. This is your "tax cost" of the asset in Canada. Keep documentary records to prove the asset’s valuations as these may be needed for reporting purposes, or if the Canada Revenue Agency (CRA) asks to see them. If you hold foreign property with a combined tax cost of $100,000 or more at any time during a year this has to be reported on your tax returns for all the years you own it. Check the box on page one of your tax return and complete and file a form T1135.

• This includes houses, bank accounts, investments, savings and any other property.
• If an immigrant from the UK purchased a house in 1980 in Britain for £25,000 and still owned it when they left the UK in 2006 and it had a market value of £200,000 and the exchange rate was then 2.2, then $440,000 is the tax cost and the amount to report.
• Note that you do not need to report foreign assets for the year you become tax resident in Canada. However, you still must report any income earned on these assets from the date you become tax resident.

The CRA is primarily interested in income earning assets.  If you rent out your foreign real estate then you must report the income and the asset value. However, if you retain property in the UK for personal use only (e.g., as a holiday home), then it is not necessary to report this, unless you have a capital gain if/when you sell it. A capital gain is calculated on the profit made in Canadian dollars.  Using the above example if the house was sold for $210,000 in 2008 when the exchange rate was 2.00 the proceeds are $420,000.  This is a capital loss for Canadian tax purposes even though it is a gain in pounds sterling. You do not need to report the value of foreign registered personal or occupational pension funds if at least part of the contributions into these funds have been made by an employer. Independent Savings Accounts are not covered by this exemption and are reportable. Other pension funds that consist entirely of contributions by an individual, such as Self-Invested Pension Plans may also be reportable and professional advice is recommended.

Firstly, a disclaimer that applies to all of my posts.  The information I post in this blog is correct to the best of my knowledge and belief at the time I post it.  However, tax law is constantly changing.  Also, personal circumstances can have a significant effect on taxes payable  and planning strategies.  Anything posted here should be considered general information and not advice that can be relied upon.

Income tax is payable by all people who are resident in Canada for tax purposes. Residency is a question of fact. The most persuasive evidence of residency is where your home is, and where your spouse and children live. If you arrive in Canada on a work permit or as a permanent resident, you normally will be considered a tax resident on the day you land. Similarly, to cease being a tax resident you must leave Canada, and relinquish all residential ties.

In the year you enter or leave Canada, you pay Canadian income tax only on the income you earn during the part of the year that you are in Canada. For more details see CRA residency information. 

You should be aware that, if you are a tax resident of Canada and permanently leave the country, you may be liable to tax on the capital gain of certain property for the time you are tax resident here. RRSPs and principal residences are excluded from this tax.

If you are tax resident in Canada, you pay income tax on your worldwide income. If, after you move to Canada, you have residual income from another country, such as interest or rental income, then this is taxable in Canada. Income within a registered pension fund is exempt, however. You generally will be given credit for foreign income taxes. This credit is limited to the lower of the foreign tax paid or the Canadian tax otherwise due on the income. Canada has tax treaties with many countries which limits the possibility of double taxation on many types in income.

If you are not tax resident in Canada by the home and family definition, but nonetheless spend more than 183 days in the country in any tax year, you may be deemed to be a tax resident for that year.  Exceptions are generally people who are deemed tax residents of their home country such as military and diplomatic personnel.  A deemed resident of Canada is subject to Canadian income tax on their your worldwide earnings for the year.

The final group of people subject to Canadian income tax are non-residents who have income  in Canada. Much of this income is subject to a withholding tax of 25%. However, interest income has a zero withholding rate and some tax treaties also specify lower withholding rates for certain types of income.