Determining your Canada Pension Plan entitlement

Canada Pension Plan (CPP) retirement benefits are available to virtually any Canadian who has participated in the work force and made contributions to the CPP and for most retirees, that monthly CPP benefit represents a substantial percentage of their income. Consequently, knowing what to expect in the way of CPP retirement benefits is crucial to an individual’s retirement income planning.

Unfortunately, it’s also a safe bet that most Canadians don’t know much they can expect to receive each month from the CPP – or even how to find out that amount. The relevant information is available on each individual’s Statement of Contributions, a document prepared annually by the federal government. However, while the federal government used to mail a Statement of Contributions to each contributor to the CPP annually, such statements are now automatically sent only to Canadians who are aged 59 to 65. Anyone else who wants to obtain a copy of their Statement of Contributions must take the initiative to obtain it from the federal government by making a specific request.

Such a request can be made by telephone, mail, or online, in the following ways:

• A telephone request for a Statement of Contributions is made by calling Service Canada at 1-800-277-9914;
• A paper copy of an Application for Statement of Contributions to Canada Pension Plan can be obtained online at hrsdc.gc.ca/cgi-bin/search/eforms/index.cgi?app=profile&form=isp2000&lang=e; or
• to view and print an individual’s Statement of Contributions online, from the Service Canada website, it is necessary to first request a Service Canada access code atservicecanada.gc.ca/eng/online/pac/pacinfo.shtml. That access code, which is sent to the individual by mail, can then be used to obtain online access to information about a number of federal government benefits, including CPP benefits.

It’s apparent that, whatever the method used, it takes a few weeks before a Statement is obtained.

Once the Statement of Contributions is obtained, however, the recipient will have all the information needed to determine his or her CPP entitlement.

A hard copy of the Statement of Contributions has three sections. The first outlines the individual’s name, the address that Service Canada has on file for that individual, the individual’s date of birth and the date that the Statement of Contributions was prepared. That last date is important because, as additional contributions are made in successive years by the individual to the CPP, the amount of benefits receivable will change.

The second section of the Statement outlines the contributions made by the individual to the CPP and pensionable earnings received each year since the age of 18, which is the first year that contributions can be made.  There is generally a lag time before contributions made show up on the Statement of Contributions – for instance, a Statement of Contributions issued during 2016 will likely show contributions made up until the end of 2015.

The third section of the Statement of Contributions is the one in which the amount of CPP benefits which may be received are summarized. And, while the CPP is generally thought of primarily as a source of retirement income, there are in fact three types of CPP benefits:

• retirement benefits;
• disability benefits (payable, as the name implies, to individuals who have contributed to the CPP but are no longer able to work because they have a severe and prolonged disability); and
• survivor benefits (payable to surviving relatives of a CPP contributor who has died).

The summary of retirement benefits shows, firstly, the amount of CPP benefits which would be payable to the individual if he or she were 65 years old at the time the statement was prepared (remembering that that amount can change, depending on the amount of CPP contributions made in future years).  That figure is followed by two figures. Where the individual is under age of 60, the statement will show the amount of benefit which would be receivable by the same individual if he or she chose to receive the CPP retirement benefit at the ages of 60, 65, or 70. Where the individual is already over the age of 60, the statement will show how much benefit would be receivable if payment were to start immediately, and also the amount of monthly benefit which would be receivable at age 65 and at age 70. The earlier the CPP retirement benefit is received, the lower the monthly benefit amount payable. For example, a person who is 62 years of age in 2016 and could receive a monthly CPP retirement benefit of $744 if benefits were started the following month would be eligible for a monthly benefit of $964 if receipt was deferred to the age of 65. Changes announced in recent years will increase the “gap” between those figures, as those who elect to begin receiving CPP retirement benefits before the age of 65 will see their benefits reduced to a greater degree than is currently the case.

Where an individual who has contributed to the CPP dies, his or her surviving spouse or common law partner is generally entitled to receive CPP survivor benefits. The amount of the survivor’s benefit payable is determined by both the amount of contributions made by the deceased contributor and by the age and circumstances of the surviving spouse or common-law partner. Continuing with the individual example above, a surviving spouse or partner of that individual who is aged 65 or over could receive a survivor’s pension of $578 per month. Where the surviving spouse or partner is aged 45 to 65, or is under the age of 45 but has dependent children, or is disabled, the monthly survivor benefit amount is reduced slightly to $545. Further reductions in the survivor benefit are taken where the surviving spouse or partner is under the age of 45 but does not have dependent children and is not disabled. Finally, dependent children of a CPP contributor are entitled to receive a monthly survivor’s benefit until the age of 18, or up to age 25 if they remain full-time students.

The amounts contributed by an individual to the CPP throughout his or her working life determine the amount of CPP benefits which will be payable to that individual later in life. Consequently, it is important to ensure that the contribution information on file with the federal government, as well as the personal information like birth date, address, and the like, is accurate and up-to-date. The birth date information on the CPP Statement of Contributions is the one registered on the individual’s Social Insurance Number record. If that information is incorrect, the individual should contact the Social Insurance Registration Office at 1-800-206-7218 to determine how to correct it. Where there is an error on the Statement of Contributions with respect to CPP contributions made or the amount of pensionable earnings received, it is necessary to write to the CPP, providing supporting documentation for the needed correction. The address to which such correspondence is sent can be found on the back of the Statement of Contributions form.

Finally, the federal government provides a great deal of information on its website with respect to the CPP and Canada’s retirement income system generally. A good starting point is the Service Canada website at www.esdc.gc.ca/en/cpp/index.page.

Planning for year-end charitable donations

The start of fall marks a lot of things, among them a number of runs, walks, and other similar events held to raise money for a broad range of Canadian charities. And, in a few months, as the holiday season approaches, charities will launch their year-end marketing campaigns.

Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit, at both the federal and provincial/territorial levels, for qualifying  donations made. Federally, taxpayers can claim a credit of 15% of the first $200 in donations plus 29% of donations over the $200 threshold. The tax credit provided by the provinces and territories works in much the same way, in that a tax credit is provided on the first $200 in donations at the lowest tax rate imposed by that province or territory, and a credit on donations above the $200 level at the province or territory’s highest tax rate. The only exceptions are the provinces of Alberta and Quebec. Alberta provides a credit of 10% on the first $200 in donations, and an enhanced credit of 21% on the balance. Quebec provides a charitable donations tax credit on the first $200 of donations at the 20% rate applicable to its middle income bracket. Donations above the $200 threshold are eligible for credit at the province’s top tax rate of 24%.

As is the case with most expenditures that benefit from favourable tax treatment, in order to make a claim for the charitable donations tax credit in a year, a donation must be made by the end of that calendar year. And, this year and next, there is an additional incentive to maximize donations made, in the form of a “First-Time Donors Super Credit”.

The name of the program is somewhat misleading, as the credit is not available just to first-time donors, but to anyone who has not claimed a charitable donations tax credit in recent years. Specifically, where neither a taxpayer nor his or her spouse has claimed a charitable donations tax credit for any year after 2007, either will be able to claim the “super credit” for donations made in 2016 or 2017.

The name “super credit”, however, is not a misnomer. While the usual federal tax credit rate for donations under and above the $200 threshold is 15% and 29% respectively, the super credit supplements the value of such credit by 25%, as shown in the following example provided on the CRA website:

An eligible first-time donor claims $700 of charitable donations in 2016, of which $300 are donations of money. The charitable donations tax credit (CDTC) and the first-time donor’s super credit (FDSC) would be calculated as follows:

• On the first $200 of charitable donations claimed, the CDTC is ($200 x 15%) = $30.
• On the donations claimed in excess of $200, the CDTC is [($700 − $200) x 29%] = $145.
• On the donations that are gifts of money, the FDSC is ($300 x 25%) = $75.
• The total of the CDTC and FDSC is $250.

There are a couple of restrictions on donations which qualify for the super credit. Only donations of money (not goods) will qualify for the super credit. As is the usual rule for charitable donations tax credit claims, the super credit can be claimed by one spouse for donations made by either, or can be shared between spouses. However the super credit is divided, it can be claimed on only $1,000 in total donations. As well, the super credit can be claimed only once.

Since the charitable donations tax credit is a two-level credit, in which the credit percentage increases once donations made in a year exceed $200, it always makes sense to aggregate donations in a single year, so as to maximize the amount of credit claimable. That advice applies especially to taxpayers who are eligible to claim the super credit, which can only be claimed once.

The super credit will be claimable only for donations made to registered charities. Any charity seeking or receiving a donation should be able to provide a registered charitable number, and a searchable current listing of registered charities can be found on the Canada Revenue Agency website atwww.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html, and information on the charitable donations tax credit and the super credit is available on the same website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/349/menu-eng.html.

Canadians household debt levels hit a record high (again)

It has become something of a dreary chorus over the past decade, as financial advisers, central bankers and even Ministers of Finance remind, warn, and even scold Canadians about the risks associated with their ever-increasing levels of household debt.

That chorus was renewed this month, as statistics issued for the second quarter (April to June) of 2016 showed that the amount of household debt held by Canadians, expressed as a percentage of disposable income, had set yet another record. At the end of that quarter, as reported by Statistics Canada, Canadians households held $1.68 in credit market debt for every dollar of disposable income.

Credit comes in many forms, of course, and it’s important to make a distinction between, in particular, secured and unsecured credit. In the first type – secured debt – the lender “secures” the debt against an asset owned by the borrower, meaning that if the debt is not repaid as agreed, the lender has the right to seize and sell the underlying asset in order to be repaid. Although any asset can serve as security for money loaned (car loans being one example), the kind of secured debt most familiar to Canadians is, of course, a mortgage. Unsecured debt, by contrast, is money provided to a borrower on no more than the strength of the borrower’s promise to repay – and the best example of that type of debt familiar to most Canadians is a credit card.

The figures released by StatsCan for the second quarter of 2016 with respect to household debt figures includes all “credit market debt”, which includes consumer credit and mortgage and non-mortgage loans. In virtually every Canadian household that has outstanding debt, the largest such debt is their mortgage, and much of the borrowing which has place in recent years has been in the form of mortgage or home equity line of credit (HELOC) borrowing, both of which are secured against the value of the home. A household which has a mortgage or a home equity line of credit therefore also has an asset – their home – which is worth more than the amount of the mortgage or HELOC and which, if necessary, be sold to pay off that mortgage or HELOC debt. There are, however, two risks to such borrowing. The first is that a downturn in the residential real estate market could mean that the value of the home drops below the amount of the mortgage or HELOC.  The second is that while the increased mortgage or HELOC debt of such households is manageable at current interest rates, those rates are at historic lows and will inevitably increase at some (unknown) point in the future.

Canadians who are carrying significant amounts of debt secured against their home do at least have the security of an asset which could be sold to pay that debt. That’s not the case for those carrying unsecured debt, and the amount of such debt is, in almost all categories, on the increase.

The credit reporting agency TransUnion recently issued a report summarizing non-mortgage debt held by Canadians during the second quarter of 2016. That report, which is available athttps://www.transunion.ca/, indicated that Canadians had reached a non-mortgage debt balance of $21,580 in the second quarter of 2016, up by just under 3% from the balance amount recorded in the second quarter of 2015.

The non-mortgage debt held by Canadians was broken down in the TransUnion report into four categories: bankcard (credit card) debt; auto loans, lines of credit, and installment loans, and the average balances held in each category were as follows:

Bankcard …………………  $3,925 (up by 2.03% year-over-year)

Auto …………………………   $19,896 (up by 3.20% year-over-year)

Lines of credit …………… $29,649 (down by 0.03% year-over-year)

Installment loans ………  $24,021 (up by 6.31% year-over-year)

It’s easy to become complacent, perhaps, when the amount of Canadian household debt, both in dollar terms and as a percentage of household net income, has increased in a series of small quarterly and annual increments, none of which may seem particularly remarkable on their own. However, a look at the longer-term trend paints a different picture.

In 1990, the amount of debt held by Canadian households as a percentage of disposable income stood at 93%. Over the next 15 years, that percentage rose by an average of 1% per year, until it stood at 108% in 2005. Five years later, in 2010, debt held by Canadian households was, on average, equal to 150% of their disposable income, meaning that such debt had risen by an average of just over 8% per year between 2005 and 2010. And, of course, as of the second quarter of 2016, that debt to disposable income percentage has reached a new high of 168%.

And, one final number which may help to put the amount of debt held by Canadian households in context: a country’s gross domestic product, or GDP, is the total value of all of the goods and services produced by that country in a given time period; for the second quarter of 2016, the amount of household debt held by Canadians exceeded, for the first time, Canada’s total GDP.

A few questions about your tax return

At the Canada Revenue Agency (CRA), taxes are a year-round business. During the spring and early summer, the CRA is busy processing the millions of individual tax returns filed by Canadians for the previous tax year. The volume of returns filed and the Agency’s self-imposed processing turnaround goals mean that the CRA cannot possibly do an in-depth review of each return filed. Once the season of processing and assessing tax returns is for the most part complete, however, the CRA moves to the next phase of its activities – specifically, the start of its annual post-assessment tax return review process.

What that means for the individual taxpayer is the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this fall by millions of Canadian taxpayers.

In 2016, Canadians filed over 28 million individual income tax returns with the CRA. The vast majority of those returns – about 24 million – were filed by electronic means (either EFILE or NETFILE), while only just over 4 million paper returns were filed. For several years, the CRA has encouraged taxpayers to take advantage of its electronic filing options, and its efforts have clearly been a success.  As the CRA has always noted, filing electronically means faster turnaround (and quicker refunds!) but, when returns are filed by electronic methods there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. There have, however, always been means by which the CRA can verify claims made by taxpayers. Where returns are paper-filed, taxpayers must usually include receipts or other documentation to prove their claims, whether those claims are for dependent tax credits, charitable donations, medical expenses, or other similar deductions and credits. For the 85% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale. The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring.

That post-assessment review process starts in the month of August. There are two components to the review process – the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included on the taxpayer’s return with information provided to the CRA by third-party sources, like T4s filed by employers or T5s filed by banks or other financial institutions. The time periods during which the two programs are carried out overlap, as the peak time for the Processing Review Program is between August and December, while the Matching Program is carried out from October to March.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income for the year.

Of course, most taxpayers are not concerned so much with the kind or program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is a precursor to an audit, but that’s not usually the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow that up to find out the reason for the discrepancy. Canada’s tax laws are complex and, over the years, the CRA has determined that there are areas in which taxpayers are more likely to make errors on their return, so a return which includes claims in those areas may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns that may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on a random basis.

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time – usually a few weeks from the date of the letter – in which to respond to the CRA’s request. That response should be in writing, attaching, if needed, the receipts or other documentation which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the Agency’s Represent a Client online service) can submit required documentation electronically. More information on how to do so can be found on the CRA website atwww.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.

Regardless of the means by which requested documents are submitted, it is possible that the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone, with a request from the Agency for more information.

One word of caution – as most Canadians have heard by now, there is a persistent tax scam operating in which taxpayers are contacted by telephone by someone falsely claiming to be from the CRA (or, more recently, from the “Federal Tax Court”, which does not exist). Such fraudulent callers generally indicate that a review of the taxpayer’s return shows that additional taxes are owed, and insist that immediate payment is required, by wire transfer of funds or pre-paid credit card. Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. As well, the CRA does not correspond with taxpayers on confidential tax matters by e-mail. The only legitimate e-mail which a taxpayer might receive from the CRA is one which advises that there is a new message for that taxpayer in his or her online account with the CRA – and only taxpayers who have previously registered for the CRA’s My Account service would receive such an e-mail. Any other type of e-mail claiming to be from the CRA is not authentic and should be deleted without opening.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain: a prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the Agency and the taxpayer.