Category Archives: News

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The DB pension plan business model has failed – and everyone is paying the price


Brent Simmons Contributed to The Globe and Mail Published September 10, 2019

Brent Simmons is Senior Managing Director & Head, Defined Benefit Solutions at Sun Life

For the past 20 years, many private-sector companies across Canada followed the same risky strategies for their defined-benefit (DB) pension plans as they did in previous decades. Unfortunately, over this time these strategies cost stakeholders almost $158-billion and jeopardized the retirement security of millions of Canadians.

As a result, many companies have abandoned these perilous approaches, but a surprising number have not. To better understand why new strategies are needed, think of the DB pension plan as a division of the company – the DB Pension Division.

A company’s employees lend the DB Pension Division money in the form of deferred wages. In return, the company promises to provide a pension to those employees when they retire. Until then, the DB Pension Division invests this money with the goal of being able to pay these promised pensions.

However, many DB Pension Divisions are investing this money in a way that’s mismatched from the bond-like promises they made to employees. They make bets on equity markets and interest rates in the hopes of generating excess returns that will make it cheaper to pay these promised pensions.

Imagine – what do you think would happen if you went to your CFO and told her that you had a great idea for a new business. You want to borrow money and invest it in the equity markets to generate excess returns for shareholders. I suspect you’d find that it would be a pretty short and career-limiting conversation!

So why would this idea work for a DB pension plan? What’s clear is that for the past 20 years, it has not.

After a lot of ups and downs, the average DB Pension Division is essentially in the same place that it was 20 years ago from a funded-status perspective.

In fact, the typical company contributed significant dollars to its DB Pension Division during this period. According to Statistics Canada, companies in Canada contributed almost $158-billion between 1999 and 2018 to shore up deficits in their pension plans. This means that a typical DB Pension Division earned a negative return – destroying value for shareholders who invested in the company.

If the business model had been successful, the typical DB Pension Division would be well over 100-per-cent funded by now and these $158-billion of contributions wouldn’t have been required.

It’s not surprising that some DB Pension Divisions stuck with their historical business models over the past 20 years. After all, interest rates were at historic lows and were widely expected to rise and equity markets had a long history of providing excess returns.

So why didn’t things turn out as expected? The business model involves making multiple bets on equity markets, interest rates, credit conditions, foreign exchange rates and life expectancy. Companies need to win all these bets consistently as the gains from good bets can be wiped out by the losses from bad bets.

Making multiple successful bets with the DB Pension Division is very hard to do – especially given the increased unpredictability of the markets over the past 20 years. In addition, most companies rely on the same investment managers as their competitors, which doesn’t create a competitive advantage for their shareholders.

Given these challenges, many forward-thinking companies are concluding that the DB Pension Division’s business model no longer works – an appropriate conclusion for a division that’s been losing money for 20 years.

The first step these companies take is realizing it’s better to take risk in their core business rather than in the DB Pension Division. General Motors was one of the first companies to articulate this strategy. In 2012 Jim Davlin, vice-president of finance and treasurer at General Motors, said: “We’re in the business of making great cars – that’s our core competency. It’s not managing pension investments to provide a lifetime income to folks.”

The second step these companies take is changing the business model of their DB pension plan to embrace better risk management. These companies are investing plan assets to match liabilities and/or transferring portions of their plans to insurers through the purchase of annuities.

The bottom line? Everybody pays the price for a failed DB Pension Division. Let’s not lose track of why we created pension plans in the first place – to help Canadians be ready for retirement. Isn’t it time to adopt better risk management and switch to a business model that works?

As posted on The Globe and Mail

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CRA updates principal residence folio


With the price of real estate skyrocketing, Ottawa is concerned that Canadians are accessing the PRE inappropriately

By: Rudy Mezzetta Source : Investment Executive August 23, 2019 00:27

The Canada revenue Agency’s (CRA) revised principal residence exemption (PRE) reporting rules, introduced three years ago, are changing the way Canadians think about a tax benefit that homeowners tend to take for granted, tax experts say.

Now that the CRA has more information about each property sold, many Canadians recognize that they need to understand the rules governing the PRE better in order to avoid paying tax on the sale of their home.

“People realize they have to fill out this paperwork now when they sell [their property] to claim the PRE,” says Debbie Pearl-Weinberg, executive director of tax and estate planning in Toronto-based Canadian Imperial Bank of Commerce’s financial planning and advice group. “We’re seeing

questions on what constitutes a principal residence: ‘Does the property qualify; what if a portion is rented out; what about change of use?’ Things like that.”

Says Mariska Loeppky, director of tax and estate planning with Investors Group Inc. in Winnipeg: “There are lots of people who will rent out their home for a while and not give a second thought to it, but that’s a taxable event.”

The CRA issued in July an updated Income Tax Folio S1-F3-C2, Principal Residence to help Canadians navigate the rules governing the PRE. The document includes information about the revised reporting requirements and key technical changes made to the PRE rules over the past few years, as well as a comprehensive explanation of how the rules work.

In October 2016, the federal government announced that beginning with the 2016 tax year, taxpayers must report basic information, such as proceeds of sale, description of property and date of acquisition, at the time the principal residence is sold in order to claim the full PRE. Previously, homeowners didn’t have to report the sale of a property if they were designating it as their principal residence for every tax year they owned it.

Under the revised reporting rules, taxpayers provide information about the sale on Schedule 3 of their tax return, and by filing Form T2091, Designation of a Property as a Principal Residence by an Individual. Late filing the form comes with a penalty of $100 per month, to a maximum of $8,000 – although the CRA did indicate, when it introduced the revised rules, that it would exercise leniency in applying the penalties. “That discretion is probably going to end at some point,” Loeppky says.

The CRA now has the right to reassess a tax return, beyond the normal three-year reassessment window, if a taxpayer fails to report the sale of a home. “That’s really a big step,” Pearl-Weinberg says, because it thwarts taxpayers who may hope the CRA won’t “discover [the sale] within the normal reassessment period.”

For many homeowners, the revised reporting rules will not hinder their ability to access the PRE, says Wilmot George, vice president of tax, retirement and estate planning with Toronto-based CI Investments Inc. The basic rules haven’t changed: if a Canadian resident (and/or the Canadian resident’s family unit) owns an eligible home – and “ordinarily inhabits” it – he or she will be able to designate the property as his or her principal residence and not pay tax on the capital gain realized on the sale.

“The message isn’t that you’re not entitled to the PRE, for the large majority of Canadians,” George says. Rather, if the property is eligible for the PRE, the message is “be sure to report it.”

The government’s motivation for tightening the reporting rules is to increase compliance in the real estate sector in general. With the price of real estate skyrocketing in recent years, Ottawa is concerned that Canadians are accessing the PRE inappropriately. In the 2019 budget, the federal government proposed giving the CRA $50 million over five years, and $10 million ongoing, to fund a task force with a mandate to ensure people are paying their fair share of taxes in relation to real estate transactions.

The government is concerned about situations in which taxpayers are repeatedly purchasing, renovating and reselling properties for profit – a.k.a. “flipping” – and claiming the PRE when they are not eligible.

“If there’s a habit of buying and selling in relatively short periods, then that might speak to the generation of business income as opposed to capital gains,” George says. Among other factors, the CRA will look at how long the property was owned, the owner’s recent transactions and whether renovations were made to determine whether profits from the sale would be considered taxable business income, George says.

The revised reporting rules also will help the CRA ensure taxpayers claim the PRE for only one property per tax year. If an individual owns multiple eligible properties – say, a city home and a vacation home – he or she can claim the PRE for one property for some years and for the other property in other years, but not for both properties in same tax year.

Individuals who own multiple eligible properties now must be more careful when deciding whether to claim the PRE at the time they sell their first home or to “save” the PRE for a second home. A formula is used to determine what percentage of the capital gain on the sale of a home the individual can shelter with the PRE.

“It can be a very complicated comparative analysis,” Pearl-Weinberg says. “You have to look at what the consequences would be right now [and] what percentage of the gain would be covered right now versus what might happen in the future.”

Loeppky advises that homeowners keep all receipts documenting the cost of the home and all improvements to it – for all properties owned. When the time comes to sell a home for which the PRE will not be claimed, the cost of the improvements can be added to the property’s adjusted cost base, lowering the capital gain that will have to be reported for that home.

“You don’t know which house will have a bigger gain,” Loeppky says. Sometimes taxpayers won’t keep receipts for their city home, but do so for their vacation home, thinking that the PRE will cover the gain in their city home – only to discover that their vacation home has incurred more of a gain. “You want to put yourself in the position of maximizing the use of the PRE when it comes time to sell,” Loeppky says.

The considerations become even more complex for a rental property when the PRE is concerned.

If a taxpayer owns a property for the sole purpose of renting it out, he or she will pay taxes on the income earned annually and, when the property is eventually sold, the capital gains on the proceeds of the sale would be taxable at the capital gains inclusion rate of 50%.

On the other hand, if a taxpayer lives in a principal residence, but rents out part of the property, the PRE still could be available if certain conditions are met, including that no structural changes are made to the property for rental purposes, and the rental use is ancillary to the property’s main use as a primary residence.

Much will depend on the facts of each case. “If you have [modified] your principal residence in some significant way, then you may have an issue as to whether you can claim the PRE,” says Doug Carroll, practice lead for tax, estate and financial planning with St. Catharines, Ont.-based Meridian Credit Union. “For people who are renting out a room, [claiming the PRE] may not be a problem if [the rental use] is not a major part of the reason that they own the house.”

Sometimes a person will own a primary residence, but wants to turn it into a rental property. Conversely, an individual may own a rental property, but wants to turn it into their primary residence. Both of these scenarios would be regarded as a “change of use” by the CRA, and be treated as a deemed disposition.

In either scenario, the taxpayer can elect to opt out of the deemed disposition, thus extending the number of years that the property can be designated a principal residence by up to four years (subject to certain conditions). These “change of use” special elections may give taxpayers more flexibility in determining when and for which property they can claim a PRE.

A proposal included in Budget 2019 would allow taxpayers to elect not to incur a deemed disposition when there has been a change in use to just a part of a property. This change to the tax rules is not yet law, and is not reflected in the updated tax folio for principal residences.

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2019 Brings Lower Taxes for Small Businesses and More Help for Canadian Workers


News release

December 20, 2018 – Ottawa, Ontario – Department of Finance Canada

Every day, in communities all across the country, Canada’s small business owners and entrepreneurs work hard to grow their businesses and create the jobs that middle class families rely on. Collectively, small businesses now account for about seven out of 10 private sector jobs.

To support Canada’s hard-working entrepreneurs, the Government cut the small business tax rate from 10.5 per cent to 10 per cent effective January 1, 2018, with a further reduction to 9 per cent coming into effect on January 1, 2019.

With this reduction, the combined federal-provincial-territorial average income tax rate for small business will be 12.2 per cent—the lowest in the G7 and the fourth lowest among members of the Organisation for Economic Co-operation and Development. For small businesses, compared to 2017, this will mean up to $7,500 in federal tax savings each year—savings that they can reinvest in purchasing new equipment, developing new products, or creating new jobs.

The year 2019 also marks the replacement of the Working Income Tax Benefit with the more generous Canada Workers Benefit (CWB). The CWB will put more money in the pockets of low-income workers—encouraging more people to join and stay in the workforce, and offering real help to more than 2 million Canadian workers. In addition to being more generous, the CWB will be more accessible than the program it replaces, as the Canada Revenue Agency will be able to calculate the CWB for anyone who has not claimed it on their tax return. Canadians will begin to receive enhanced benefits under the new CWB in early 2020, when they file their 2019 tax returns.

Details on these and other tax measures coming into effect in 2019 are available through the links below.

In addition, the Government’s 2018 Fall Economic Statement introduced three immediate changes to Canada’s tax system that will further support investment, jobs and growth in Canadian businesses, creating opportunities in communities across the country. These changes, which apply to qualifying assets acquired after November 20, 2018, include:

  • Allowing businesses to immediately write off the full cost of machinery and equipment used for the manufacturing and processing of goods.
  • Allowing businesses to immediately write off the full cost of specified clean energy equipment.
  • Introducing the Accelerated Investment Incentive, which will allow businesses of all sizes in all sectors of the economy to write off a larger share of the cost of newly acquired assets in the year the investment is made.

Originally Posted On Government of Canada

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Phil Heisz Elder Planning Counselor


Press Release

PHILIP HEISZ Qualifies as a Member Of “Elder Planning Counselor” Program

TORONTO, ON – A nationally recognized designation, was conferred on Philip Heisz after successfully completing an intense and rigorous test of knowledge regarding current seniors issues.  The “Canadian Initiative for Elder Planning Studies” (CIEPS) course was established as a standard of service to seniors for all professionals and business people in providing seniors with high quality services and products that best suit their lives and circumstances.  The “Elder Planning Counselor” (EPC) designation will immediately help seniors identify the business people and professionals who have a special interest and proficiency in dealing with them and their needs.

“Studies show that seniors want advisors who understand their life issues, alternatives and concerns, which respect their circumstances and experiences and can accommodate their physical and health needs.  The EPC is the Canadian professional development standard for elder education,” says Thomas Miller, President of CIEPS.

Achieving this designation is a distinguished career milestone, attained only by those who have demonstrated proficiency in all relevant programs about seniors issues, including aging, health issues, financial planning considerations, long term care as well as end of life issues.  This makes the “EPC” graduate a valued counselor to seniors, regardless of the service or product they provide.

The Elder Planning Counselor educational program has been designed by Canadians for Canadian Professionals.

For further information visit

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When the CRA calls:


Jamie Golombek on his 10-month, transit pass reassessment saga
Don’t panic if you get a plain brown envelope from the CRA — but some frustration may be unavoidable

Originally posted Financial Post website.

If you recently received a letter in a plain, brown envelope from the Canada Revenue Agency, chances are it was because your 2017 personal income tax return is being reviewed to “make sure the benefits or credits you’re receiving are correct.”

If you received such a letter, the CRA’s advice, issued in a press release this week, is: “Don’t panic. You’re not alone.”

Each year, the CRA sends out approximately 350,000 letters and questionnaires asking taxpayers to provide additional information to ensure that taxpayers are properly entitled to the various benefits, deductions and credits which they claimed on their returns.

They may ask for documents to confirm that the information in the CRA’s records is correct and up to date. For example, the CRA may ask you to validate your marital status, where you live, and who cares for your children. This information can change as life events occur and may affect both whether you’re eligible to receive certain benefits and credits and how much you may be entitled to receive.

Normally, you have to respond within 45 calendar days. If you can’t get the documents the CRA is asking for or if you need more time to reply, you can call the number provided in the letter to ask for guidance and more time. If you ignore the letter or don’t reply in time, your benefits will stop and you may be asked to repay benefits or credits that were previously sent to you.

Any requested information and documents can be scanned and downloaded online using the CRA’s My Account portal or they can be sent to the CRA by mail or by fax to the address or fax number provided in the CRA’s letter.

The CRA advises taxpayers that “it’s important that you reply and send all the information requested as soon as possible. This will help the CRA review your file quickly and easily.”

Of course, how one defines “quickly and easily” is another matter. Let me share with you my own, personal experience of dealing with the CRA on such a letter.

The letter — October 2017

On Oct. 20, 2017, I received a letter from the CRA indicating that my 2016 tax return was being reviewed. The six-page, single-spaced typed letter was asking for detailed information about my claim for the public transit credit.

You may recall that prior to July 1, 2017, you could claim the cost of monthly or annual public transit passes for travel within Canada on public transit. The credit was eliminated in the 2017 federal budget, with the government concluding that “this credit has been ineffective in encouraging the use of public transit and reducing greenhouse gas emissions.”

The public transit amount the CRA was reviewing was $747. Note that this was not the amount of tax under review as the transit “amount” was eligible for a non-refundable federal tax credit at 15 per cent, meaning the CRA was asking for proof to substantiate a $112.05 federal tax reduction I claimed on my 2016 tax return.

Fortunately, I’m careful to keep all my receipts in a well-organized file and was easily able to photocopy each month’s Toronto Transit Commission (TTC) Metropass and scan them for download to the secure CRA My Account web portal.

I submitted the documents on Nov.17, 2017. And then, I heard nothing. For days. Then weeks. Then months.

The first reassessment — Feb. 2, 2018

On Feb. 2, 2018, I came home to find a brown CRA envelope waiting in my mailbox. Initially, I was excited as I assumed that this would be the reassessment I was waiting for, granting me my 2016 transit credit.

Alas, it was not to be. Rather than confirming my transit credit, I received a formal notice of reassessment saying I owed $112.05 of tax plus $2.12 in arrears interest.

The next day, I received a four-page, single-spaced letter from the CRA politely informing me that “we have adjusted your claim for the public transit amount from $747.00 to $0.00.” The reason? According to the CRA, while “we acknowledge (receipt of the copies of) the front sides of your Metropasses … the passes do not contain all the required information which includes … the identity of the rider.”

In other words, the CRA denied my $112.05 transit credit because I did not send them photocopies of the back sides of my Metropasses, which contained my “unique” signature. Was the CRA perhaps worried that I was borrowing someone else’s transit passes for the purpose of illegally claiming the credit?

Rather than be discouraged, I promptly photocopied the back sides of my Metropasses, clearly showing my signature on each one, scanned the documents and submitted them electronically to the CRA.

And then I waited again. For weeks. Months. Nothing.

While I attempted to follow up at least half a dozen times, I was unable to get through to the CRA on the phone until late July 2018. When I reached an agent, they were unable to explain why the matter still hadn’t been resolved, despite acknowledging receipt of my additional information nearly six months earlier. I was told that my 2016 return would be “expedited” for immediate processing.

The second reassessment — Aug. 23, 2018

Last week, I finally received a new notice of reassessment which stated that “We changed your return to reinstate your claim for the public transit amount.” It was issuing me a refund of $112.05 and reversing the $2.12 of arrears interest I was previously charged. In fact, I was even paid some refund interest of $3.21.

And the icing on the cake? The CRA was kind enough to remind me that since the $3.21 of refund interest “is taxable in the year you receive it, you have to include it as income on your 2018 tax return.”

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.

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CRA to Tax Registered Investment Fees Paid From Open Accounts


Originally posted on By Melissa Shin

If your clients pay their registered-account investment fees from open accounts, revisit that practice with them now.

At the November 2016 Canadian Tax Foundation Conference, CRA told attendees that paying registered plan fees from non-registered, or open, accounts, will incur a tax penalty equivalent to the fee.

CRA views the practice as creating an unfair advantage because it’s an indirect increase in the value of the registered plan — so the agency has changed its administrative position.

Now, “a controlling individual who pays investment management fees with respect to his or her RRSP, RRIF or TFSA outside of the plan could be subject to a tax equal to the amount of fees paid,” says a PwC release on the issue.

CRA will begin taxing people who pay fees in this manner as of January 1, 2018, and the tax will be punitive: based on CRA’s wording, if a person pays $100 in registered fees from an open account, she would trigger $100 in tax.

Michelle Connolly, vice-president, Tax, Retirement and Estate Planning at CI Investments, says people typically pay fees from outside their registered accounts to preserve registered capital and reduce taxable capital and potential income instead. But this tactic is predominantly a deferral, she points out, since the preserved registered capital will eventually be taxed as regular income upon withdrawal.

Some advisors argue preserving registered capital allows for greater compounding, she adds, but “I never viewed [fee redirection] as a top-three planning idea,” she says.

Read: Investment fees — what’s deductible?

Connolly says there are three main situations where people redirect fees:

  1. An individual taxpayer pays for her own registered account’s fees out of her open account.
  2. An individual taxpayer pays for someone else’s registered account fees out of his open account. One example, says Connolly, is a grandfather paying his grandchildren’s TFSA fees out of his open account.
  3. A joint account pays for one or both of the individual’s registered account fees.

Overcontribution risk

With this administrative change, CRA is focusing on the advantage created by paying the fee from an open account. But there’s another risk to fee redirection: overcontributing to a registered plan.

Let’s say a person contributes the maximum $5,500 to her TFSA, owes $100 in investment fees, and pays those fees from outside the TFSA. Under CRA’s new position, “she will have been viewed to have contributed $5,600,” says Connolly. And, not only will she have to pay $100 in tax due to her fee redirection, she may be penalized $1 per month (1% of the excess) for overcontributing to her TFSA. “Will CRA go that far?” asks Connolly. “Potentially.”

Read: The risks of overcontributing to an RRSP

What advisors should do

“An advisor should look at any clients that are redirecting fees on registered accounts and discuss these changes with clients,” says Connolly. “As of January 1, 2018, CRA will now view [fee redirection] much more aggressively.”

If the grandfather in our example wishes to help his grandchildren pay for investment fees for non-tax reasons, he can gift them an equivalent amount in cash after the grandchildren pay the fees out of their registered accounts.

The PwC release says CRA may announce administrative concessions when it releases its tax folio in early 2017. But Connolly says it’s unlikely that there will be any concessions.

Read: How to fix TFSA overcontributions

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Federal Liberals eye tax on private health


Originally posted on National Post December 2, 2016 by John Ivison

Federal Liberals eye tax on private health and dental plans, a move that would take in about $2.9B

The Liberal government is considering taxing private health and dental plans, in a measure that would raise about $2.9 billion, sources say.

As many as 13.5 million Canadians have lower tax bills because health and dental benefits are not treated as taxable outside Quebec.

Dan Lauzon, a spokesman for Finance Minister Bill Morneau, said no decisions have been taken and that any moves would not be made in isolation. The employee-sponsored health care tax exemption is being scrutinized as part of a sweeping review of 150 tax credits worth about $100 billion a year in foregone federal revenue.

Lauzon said the review is not being seen as a revenue-generating exercise.

The Department of Finance has asked seven external experts to look at the tax system to ensure that it is as fair, efficient and simple as possible.

It is understood the academics reviewed health and dental benefits, but it is not clear what they recommended.

The argument for killing the health and dental benefit exemption is that it does not treat all remuneration equally.

Most employee benefits are taxed – for example, life insurance paid by employers are reported on employees’ T4 slips and included as taxable income. Similarly, a car paid for by an employer is taxed.

But health benefits are an exception. Proponents of eliminating the credit argue that those with lower incomes but without private health plans are subsidizing those with employee-sponsored coverage.

On the other hand, there is a strong economic case for encouraging employers to provide health coverage for employees.

Quebec included health and dental plans as a taxable benefit in the early 2000s and found that employers scaled back the coverage offered.

The Liberals have been clear that they intend to take action on eliminating some tax credits, particularly those that benefit higher-income Canadians.

Morneau told the Senate finance committee that changes are coming.

“We think we did make some simplifying efforts in budget 2016, but we know there’s more work to be done in this regard to look at things that no longer have the desired impact,” he said. “It’s an effort that we’re pursuing.”

The 2016 budget removed the children’s fitness tax credit and the children’s arts tax credit.

During the 2015 election campaign, the Liberals talked about reducing or eliminating the credits for individuals paid by stock options. but backed away, over concerns from Canada’s high-tech sector.

Any attempt to hit health and dental coverage would be controversial, particularly because of the many Canadians who receive it.

But the prospect of raising such as much as the $2.9 billion forecast in the current Report on Federal Tax Expenditures might prove too enticing for Morneau to ignore.