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CANADA PENSION PLAN MODIFICATIONS FOR 2019

Changes to the Canada Pension Plan, which were announced in 2016, will come into effect on January 1, 2019. At that time, pension benefits and premiums will gradually begin escalating.

Currently, premiums are deducted at a rate of 4.95% for employees, and 9.90% for the self-employed. As of January 1st, the rate will increase to 5.10% for employees, and 10.20% for the self-employed. Over a five year period, these  rates will gradually climb, so that by 2023, employee premiums will be 5.95%, and self-employed premiums will be 11.90%.

 

In addition to premium increases, the Year’s Maximum Pensionable Earnings (YMPE) will also be increasing. In 2019. The YMPE will be $57,400, meaning that the maximum premiums that could be paid by an employee in 2019 will be $2,928, and the maximum premiums that could be payable by a self employed individual will be $5,855.

Eventually, the escalations in premiums will result in expansions in the amount of benefits employees will receive when they retire.

Currently, the maximum pension available is 1/4 of YMPE, which results in a pension of approximately $13,600 in 2018. This will gradually rise to 1/3 of YMPE, although the change will not be fully implemented for 40 years, when all of an individual’s premiums will have been paid using the higher rates.

Because of the growth in Canada Pension Plan premiums, the federal government has introduced changes to the Working Income Tax Benefit. These changes will help to offset the additional premiums for low income individuals. They have also changed the name of the program to the Canada Workers Benefit.

Did You Know…About Old Age Security?

You can defer the receipt of Old Age Security benefits until you have reached the age of 70. Much like the option to defer your Canada Pension Plan benefits, this would allow you to receive an increased Old Age Security payment once you turn 70. The most significant advantage would be to those people who, perhaps for reasons of increased private pensions or employment incomes during their 60s, would have their Old Age Security clawed back until they reached the age of 70, when their pension or employment income decreases. You must apply to defer your Old Age Security payment within six months of your 65th birthday.

Tax Planning: Care Home Fees

8As each year passes, many seniors face rising health expenses, especially when it comes to nursing home fees. Personal care homes equipped with government-subsidized beds charge fees based on each resident’s personal tax return. Therefore, in years of medical need, the greater the income you report on your tax return, the greater the fees you will pay at your nursing home residence.

In essence, the government will charge you 80% of your after -tax income for residential care home fees. This amount is determined using your net income (line 236 of your tax return), less your Registered Disability Savings Plan income, Universal Child Care Benefit income, and any income taxes paid.

For example, if your net income was $30,000, and you paid $3,000 in income tax, your after-tax income would be $27,000. Eighty per cent of this amount would be $21,600. Dividing this total by 12 would result in a monthly personal care home charge of $1,800.

There are allowances for lower income individuals who have an after-tax income less than $19,500. If you were in this situation, you would deduct $3,900 from your after-tax income to determine your monthly fee. The final fee would be subject to a minimum monthly amount that is set each year. This year, British Columbia’s minimum monthly public personal care home fee has been set at $958.90.

There are several strategies you may wish to consider in order to keep your residential care home costs down. One of the most important strategies would be to split your pension with your spouse. Ordinarily, the higher income spouse would want to split their pension with the lower income spouse, allowing for lower income tax rates. However, the nursing home fees are essentially an 80% tax, compared to a maximum 43.70% income tax rate. Therefore, it may make more sense for the lower income spouse to split their pension with the higher income spouse, if the lower income spouse is living in a nursing home.

In other tax-planning situations, pension-splitting percentages could allocate a maximum income to the lower-income spouse/resident which would still result in the minimum monthly fees.

In addition, if you are planning on transferring investments to your adult children in the future, it may make sense to transfer them now. This step could reduce the amount of investment income realized on your personal return, potentially allowing for a reduction in residential care home fees.

If this applies to you or your family, contact your Kemp Harvey Group professional.