Tax Tips & Traps

In a July 23, 2020 Tax Court of Canada case, at issue were a number of expenses claimed by the taxpayers (a corporationand its sole individual shareholder) in respect of the business of selling financial products and providing financial planning advice. CRA denied various expenses spanning 2007 and 2008 and assessed many of them as shareholder benefits.  That is, the amounts were taxable to the individual shareholder and not deductible to the corporation.

CRA also assessed beyond the normal reassessment period on the basis that the taxpayers made a misrepresentation attributable to neglect, carelessness, wilful default or fraud.  They also assessed gross negligence penalties which is computed as the greater of 50% of the understated tax or overstated credits related to the false statement or omission, and $100.

The following expenses were reviewed:

• bonuses paid to family members who were not employees of the taxpayer;
• payments to family members under an Employee Profit Sharing Plan (EPSP) where there was no evidence that the payments referred to profits;
• salaries paid to family members (including the shareholder’s daughter who received a salary of $5,000 in 2007 and $400 in 2008);
• salaries paid to the taxpayer’s children’s care providers;
• salaries to the taxpayer’s former spouse, which the taxpayer argued was the same as personally paying spousal support;
• travel costs for the taxpayer and his family to go on a cruise on which the taxpayer made business-related presentations (CRA conceded the taxpayer’s travel costs);
• significant interest expense with very little support; and
• many other costs such as clothing, toys, jewelry, personal items, lawncare, maid service, and pet care for the shareholder and family members.

While the normal age to begin receiving regular CPP is 65, individuals can apply to start receiving earlier at a cost, or later for a greater benefit:

• If the individual starts before age 65, payments will decrease by 0.6% each month (or by 7.2% per year), up to a maximum reduction of 36% if started at age 60.
• If the individual starts after age 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if started at age 70.

The decision as to when to commence CPP payments can be very complex, with extensive variables to consider, primarily related to personal factors and economic scenarios.  While 95% of Canadians have consistently taken CPP payments at normal retirement age (age 65) or earlier since the CPP introduced flexible retirement in the 1980s, a July 27, 2020 report (The CPP Take-Up Decision) by the Canadian Institute of Actuaries and the Society of Actuaries examined whether that is always the best option.

The report compared receiving CPP commencing at age 65 against pulling funds from RRSP/RRIF savings to replace the CPP payments and then commencing CPP at age 70. The two primary factors which influence the decision are life expectancy and rate of return. In particular, the report noted the following:

• A major advantage of increasing CPP payments via postponement is that the increased CPP provides additional secure lifetime income that increases each year alongside the price of consumer goods, thus protecting against inflation, financial market risk, and the risk of outliving retirement savings.
• Given today’s low-interest-rate environment and general population longevity expectations, the report noted that delaying CPP paymentsis often a financially advantageous
  • In the risk-free investment comparison, 75-80% of Canadians within this framework receive more income by delaying their CPP payments.
  • Even in an extreme case that favours not deferring CPP payments (low longevity expectations and very high expected investment returns), a person faces a 50% probability of receiving more income by delaying CPP payments, along with the risk-reduction benefits of a delay mentioned above.
• Higher-income Canadians have longer life expectancies than lower-income Canadians, and females generally live longer than males; therefore, it would more often be in their best interest to delay CPP payments.

ACTION ITEM:  Consider whether starting CPP before, after, or at age 65, would be the most advantageous.