Tag Archives: Group RRSP

Taxable, non-taxable employee benefits

When you are interviewing for a new a new job, perks like company-paid gym memberships, tuition reimbursement or a free cellphone may seem really attractive and influence you to accept the position. However, it is important to keep in mind that come tax time, all or part of the value of these employee benefits may be included in taxable income on your T4 slip.

Here are 10 things that may form part of your compensation and how they are viewed by CRA.

  1. Group benefits: Amounts your employer pays for your life, accident and critical illness insurance coverage are taxable benefits. But when the company pays all or part of the cost of your extended health care, dental plan, short-term disability (STD) or long-term disability (LTD) insurance you do generally not pay tax on the premiums. If you collect on your STD or LTD insurance you will pay taxes if any part of the premiums were employer-paid.
  2. Pensions/Group RRSPs: Your company’s contributions to your pension plan are not taxable. However, your employer’s contributions to your Group RRSP account are viewed as additional taxable income by CRA. But you can deduct RRSP contributions (up to $26,010 for 2017) so you will not actually have to pay taxes on Group RRSP contributions made by your employer on your behalf.
  3. Service and recognition awards: Cash, gift certificates and things like gifts of stock certificates and gold coins are always taxable benefits. However, you can receive tangible tax-free gifts or awards worth up to $500 annually in some specified circumstances, such as a wedding or outstanding service award. In addition, once every five years you can receive a tax-free, non-cash long-service or anniversary award worth $500 or less
  4. Clubs and Recreational Facilities – If your employer pays or subsidizes the cost of membership or attendance at a recreational facility such as a gym, pool, golf course, etc. it is considered a taxable benefit. But if the company provides a free or subsidized onsite facility available to all employees, it is not a taxable benefit.
  5. Tuition reimbursement: If you get a scholarship or bursary from your employer it will be a taxable benefit unless you took the program to maintain or upgrade your employment skills. For example, if you need an executive MBA to be promoted, no tax is payable on the value of company-paid tuition. Where the company gives your child a scholarship or bursary, generally neither you nor your son or daughter who gets the scholarship has to pay taxes on the amount.
  6. Transit Passes: Transit passes are a taxable benefit unless the employee works in a transit-related business (such as a bus, train, or ferry service business).
  7. Child Care Expenses are a taxable benefit unless child care is provided to all employees in the business at little or no cost.
  8. Mobile phone or internet: Charges paid by the company for the business use of your cellphone and internet are not taxable. If your phone or internet is used in part for personal reasons, that portion of the bill should be reported on your T4 as a taxable benefit. However, if the cost of the basic plan has a reasonable fixed cost and your use does not result in charges over the cost of basic service, CRA will not consider any part of the use taxable.
  9. Subsidized meals: If the company cafeteria sells subsidized meals to employees, this will not be considered a taxable benefit as long as employees pay a reasonable amount that covers the cost of food preparation and service.
  10. Discounts on merchandise: Generally, if your employer sells merchandise to you at a discount, the benefit you get is not considered taxable. A document posted on the CRA website in late 2017 suggested that CRA’s interpretation changed, but National Revenue Minister Diane Lebouthillier subsequently announced there have been no changes to the laws governing taxable benefits to retail employees.

This chart illustrates whether taxable allowances and benefits are subject to CPP and EI withholdings. The employer’s Guide: Taxable Benefits and Allowances, including What’s New? Can be found here.

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Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

How we are spending our 2000 hours

By Sheryl Smolkin

Designed and crafted by Joel Troster 2016

A press release I read recently titled “What will you do with your 2,000 hours a year when you retire?” made me stop and think about how my husband and I have spent our time since I left my corporate job 11 years ago and he fully retired in mid-2015. 

An RBC survey of 1,500 working Canadians age 50 and older found almost three-quarters (73%) are unsure what they’ll do with that extra time. While the study found nearly two-thirds (64%) have done some planning for how they will finance retirement, less than half have planned for retirement lifestyle decisions, such as where they will live, where they will travel (44% each) and what activities they will do (46%). 

I was 54 when I retired from a benefits consulting firm with a reduced pension and post-retirement medical benefits. I never intended to stop working and had a job lined up as editor of an employee benefits magazine working from home. That eventually morphed into a freelance writing business. 

My husband had no pension other than government benefits when he retired from his position as a software engineer with a major telecommunications company at age 65. However, over the years he made maximum allowable contributions to individual and Group RRSPs. After a couple of months’ break he contacted his former employer about contract work, but no opportunities have materialized.

We moved to a new “infill” house in Toronto near the subway in 2001 and since then, the value of our two-story plus basement home has doubled in value. We’d love to renovate a large bungalow and stay in the area, but the prices of even much smaller homes have increased so much that we would end up with significantly less house for the same amount of money. 

Based on a previous mobility issue, I‘d like to be living on one floor sooner rather than later, but for now we are staying put. We go to the gym regularly and climbing stairs helps us stay fit. When we were both working we paid for regular housecleaning, snow removal and grass-cutting. We now employ outside help less frequently but we are prepared to ramp it up again if one or both of us has health problems. 

Vacations are a high priority for us and our favourite mode of travel is cruising. We want to see and do as much as we can as long as we are healthy and able to purchase comprehensive travel health insurance. At least once a year, we try to bring our daughter’s family living in Ottawa on holidays with us so we can spend more quality time with them. 

Paying for expensive travel is one explanation for why I continue taking on freelance writing jobs. But the other reason is that I thrive on deadlines and I really love to get paid for something I enjoy doing. My hobbies include reading, working out and singing in a community choir but interviewing and writing provides me with both structure and a creative outlet. I work about 30 hours a week so I have loads of flexibility to fit in personal appointments, travel and family time. 

In contrast, my husband has found a whole new creative outlet since he retired. He finished off a coffee table that he has been working on for years and there is a matching end table on the drawing board. He has also designed and a produced a series of beautiful cheese boards, bread boards and cutting boards (see above) that friends and family have received as welcome gifts. While in future he may consider selling a few of his pieces there is no pressure for him to do so. 

I can’t say we exactly planned in advance how we would fill up our days when we left the world of work, but once our finances were in order, we had the latitude to make it up as we went along. We know that retirement in our 50s and 60s (the go-go phase) is likely to be different than in our 70s and 80s (the slow-go phase) or even 90s (the no-go phase) but I think we’re on the right track. I’ll know when it is time to send out the last invoice and together we will decide when it is the right time to sell our house and downsize. 

Have you thought about how you will spend your time once you leave the office for the last time? Tell us how you are spending your 2,000 hours by sending an email to socialmedia@saskpension.com.  We’d love share your story.

Actuary Karen Hall: Turning DC savings into an income stream

By Sheryl Smolkin

Click here to listen
Click here to listen

Today I’m interviewing actuary Karen Hall for savewithspp.com. Prior to her recent retirement, she was a vice president at the consulting firm Aon Hewitt, based in Vancouver. In addition to enjoying her retirement, she is continuing to explore cost effective and easy ways to create a steady income out of defined contribution (DC) pension savings.

Karen has 35 years of professional experience in the areas of pension actuarial consulting, flexible benefits consulting, senior management and HR leadership. She is also the author of the book, Risk Management Strategies for an Aging Workforce available on Amazon. Thanks so much for joining me today, Karen.

 

Q: Most Canadians in the private sector today have defined contribution pension plans. Tell me how a DC plan works.
A: Well, Sheryl, defined contribution means the contributions going in are defined or fixed. The member and her employer each contribute to the plan. The member often chooses how the money is invested from a number of investment options provided by the plan. Then, when the member comes to retire, she has a lump sum amount saved.

Q: On retirement, the conversion of DC assets into retirement income is for the most part left up to retirees. Why is that a problem?
A: If you buy an annuity you don’t get much in income for the amount you saved. The only other alternative is doing it yourself, that is, choosing investments, deciding how much to withdraw and figuring out how to make the money last for your lifetime. If you rely on advisers for any of this, you’re typically paying a substantial fee of at least 2% of your assets every year. The average person is just not equipped to make these decisions. I find it complicated enough and I’ve been living and breathing pensions for 35 years.

Q: Frequently, insurance companies or other DC or Group RRSP carriers, have group registered retirement income funds that retiring members of client group retirement plans can move their money into at retirement. Do these plans resolve some of these issues of high retail fees and poor financial literacy that you identified in our last question?
A: I don’t think they do. It would depend, of course, on the deal. But, often the fees are still quite high, near 2%, and the individual is still making all of the decisions I just mentioned.

Q: So how common are Group RRIF’s established for retirees of just one employer and what are the pros and cons of these types of arrangements?
A: Based on my experience, they aren’t that common. I can see why plan sponsor companies don’t want the ongoing administration. But I do think it would be great if the retiree could basically just stay in the plan and get the same investment options and fee deals as when they were active.

What I do see more often is where the insurance company that is the record keeper for the plan will have options for the member to transfer into their individual RRIF products, perhaps with a modest reduction in fees as compared to a retail purchase.

Q: How much clout do individual DC plan sponsors have in negotiating fees for their former members in rollover plans or single organization Group RRIF’s?
A: Well, as with everything, it depends on the size of the employer and on how much the employer wants to push for such a service. I do know of large employers who have negotiated such services.

Q: How should investment options be structured in rollover plans and single company Group RRIFs to maximize value from a DC plan in the decumulation phase?
A: In my view, the same options as when the member was active should generally be fine. The plan could add a target date type option for accounts and payments. But I think the typical choice of a range of balance funds and funds with conservative to moderate risk. You are going to live a fair number of years in retirement, so your time horizon isn’t that short.

Q: Saskatchewan and several other provinces, plus federal pension legislation, now allow payment of a variable pension from a DC plan – that means a stream of income that tries to simulate a defined benefit pension. Could you briefly explain to me how it works?
A: Well, it does depend on the plan and the legislation how they set it up, but very generally such an arrangement would allow the plan to provide payments to retirees. Like you said, it would simulate a defined benefit type of pension. There would generally be monthly payments and the amount of each payment would vary depending on plan experience.

For example, one client I know determines the amount of the monthly payment once a year. The amount is leveled for the year, so it’s paid every month at a level amount, but then it gets recalculated every January and depends on how well the fund did in the previous year. Generally – hopefully – it usually goes up or slightly or stays about the same. However, if it was a really bad year like 2008, the monthly pensions would likely be reduced.

Q: And how do they draw down funds in terms of various funds or investments the members are invested in or cash or whatever is actually sitting in the member’s account?
A: Well, in this particular one, when you retire and choose a variable pension, you have a lump sum amount and that lump sum amount gets translated into a number of units in the fund. Then, the fund pays a pension based on a dollar amount per unit, so the dollar amount per unit times the number of units you have, that’s what you get.

And what’s happening in this one is they’re insuring the mortality, so you don’t actually see your lump sum getting drawn down, you’re guaranteed to get that amount however long you live, and then the mortality is spread amongst the group.

Q: Oh, that’s really interesting. So it’s not just a matter of investments being sold and your money being distributed once a year, like if you had your own individual RRIF.
A: Right. So the plans can offer an individual RRIF and in those circumstances you’d see your money getting drawn down. But these variable pension ideas are to do with pooling the mortality risk.

Q: So to what extent have employers taken advantage of their ability to pay variable pensions to enhance the value of their DC plans to plan members in this all important decumulation phase?
A: As far as I know, not many have done so. Well, I know the one I gave in my example, but I don’t know of any other examples.

Q: And why do you think that’s the case?
A: Well, I think that it’s just new, right? CAP Guideline Number 8 says that plan sponsors should help members transition, but it’s new and sponsors are still considering their options. They are watching to see what others will do.

Q: Is there a real cost or a potential liability to employers that take on this responsibility?
A: That’s the big issue. For example, if you don’t have a big enough group, it’s hard to pool the mortality risk. The other thing is I’m not sure members are clamoring for variable pensions. Plan sponsors will pay attention when it affects active members and their appreciation of the benefit. I know there are plans that are interested in designing this and we’ll probably see how it develops in the next few years .

Q: Do you think it will be more of interest to public sector or private sector?
A: I think the public sector will have more ability to implement these and I think that union groups without a defined benefit plan might be interested.

Q: How important is effective employer communications in adding value to DC benefits for retirees in the decumulation phase?
A: Some employers are doing more to help members understand their options and prepare for retirement in the decumulation phase. For example, they provide one to three day retirement preparation seminars that can help considerably. I do still think, however, that individuals are not equipped to make many of these decisions. And you can put design features into DC plans that would help members better with the decision making.

Q: Could you give me an example of one or two of those?
A: Auto enrollment, auto escalation, and the design feature that we were just talking about — variable pensions — that would assist members with decision making in the decumulation phase would help.

Q: What role can annuity purchases play using all or part of the money in the plan members, DC account or RRIF to enhance the orderly draw down funds after retirement?
A: Annuities are expensive when the person is first retiring. However, I would definitely consider purchasing an annuity after about my mid 70’s. At that point, the insurance element becomes more interesting and significant because you don’t know if you’re going to live a few more years or a couple of more decades.

And the financial impact of living 2 or 20 years more is huge. The security that an annuity can give becomes much more worthwhile. So one strategy could be to separate your savings into two buckets: A: the amount you will need at age 80 saved via the annuity and B: the RRIF or the amount you’re going to spend between now and age 80. This is a bit easier to deal with, because the time frame’s better defined.

Q: That’s interesting. So do you have any other comments or suggestions that people are approaching retirement with a DC pensions or group/individual RRSPs to think about?
A: Well, focusing on just the DC pension is helpful, but I do think it’s also an incomplete solution. If the person has properly saved for retirement, he/she doesn’t have just one DC or Group RRSP account.

Even if they combine savings from previous employers, the spouse probably has registered savings, both spouses might have their own tax-free savings account and they probably have non-registered money too.

All these sources of income must be coordinated so the individual can meet their retirement and personal financial goal. Either the person has to educate themselves to manage on their own or they need help in finding an appropriately qualified financial adviser to assist them.

Right now in Canada, the price of such assistance is, in my view, unreasonably high. I also feel that many financial advisers do not have much experience with effective decumulation of retirement savings. Individuals have to look hard to find the right person.

Well, thank you very much. I really appreciate that you spoke to us today, Karen.

You are very welcome. It’s a pleasure, Sheryl. Thank you for asking me.


This is the edited transcript of an interview conducted by telephone in July 2015.

Taking full advantage of your employee benefits

By Sheryl Smolkin

SHUTTERSTOCK
SHUTTERSTOCK

Everyone wants a raise and to make more money. One of the easiest ways to do that is to take advantage of your employee benefits. Here’s a checklist that can help you unlock the full potential of your workplace benefits.

  1. Maximize retirement savings
    Many employers match employee contributions to Saskatchewan Pension Plan, the company pension plan or Group RRSP by as much as 5 or 6 per cent of their employees’ salary. Over time it’s worth a bundle.
  2. Consider company stock
    Your company may have a payroll deduction plan that lets you buy shares at a discount. It is a taxable benefit and any decision to buy company stock should be part of your overall investment strategy. When Nortel failed, many employees who owned company shares lost both their jobs and a significant chunk of their nest eggs.
  3. Submit all medical bills
    Often your pharmacy and dentist will submit bills directly to your insurance company. However, other bills must be submitted by you. Check out your plan to see what’s eligible, keep the receipts and submit them. Even small amounts add up.
  4. Coordinate benefit plans
    If you and your spouse, or partner, have benefits make sure they are co-ordinated. Instead of getting a portion of your bills paid, you may be able to collect it all by using both. If a root canal costs $1,000 and your company only pays half, you have a lot to lose.
  5. Health Care Spending Account: Use it or lose it
    Health Spending Accounts are a popular way for employers to give employees benefits choice. The company provides a lump sum, say $500, which can be used to pay for things not fully covered by the basic medical plan. Check your benefits information to understand how your HSA works. Also make sure to read and act upon statements or emails advising you that your HSA balance will be forfeited if it is not used by a certain date.
  6. Monitor your maximums
    Make sure you know how much you can spend each year for dental work, physiotherapy, massage therapy, orthotics or glasses. Time your appointments and purchases accordingly.
  7. Maternity and parental leave top up
    Ottawa pays up to $501 a week for 50 weeks of parental leave, after a two-week waiting period. Many companies pay full salary for the waiting period and top up to 95 or 100 per cent of salary. To be eligible for the government and company benefits you have to accumulate at least 600 hours of insurable employment in the previous year or since you lasted collected benefits.
  8. Employee Assistance Plan
    Employee Assistance Plans offer a lot of value. They are available at no cost to you by telephone 24/7. Getting the help you need when you need it is priceless if it means you can function well enough to keep your job or hold your family together in a crisis.
  9. Tuition reimbursement
    Many companies will pay for tuition if the course is approved and you pass. If your employer is willing to fully or partially fund an Executive MBA, you’ve really hit the jackpot. The 2013/2014 fees for a distance MBA from Athabasca University can be up to $50,000.
  10. Get fit at work
    Take advantage of in-house gyms, sports teams and wellness challenges to get fit for free. Working out is also more affordable if your employer has negotiated a corporate rate at a fitness club and/or subsidizes fitness club memberships.
  11. Use up your vacation days
    Your company probably has restrictions on unused vacation that can be cashed out or carried over to the next year. Check the rules and use them up.
  12. Corporate travel
    Corporate travel can be more of a pain than a perk if it takes you away from home for long periods. However, business travelers rack up a huge number of airline points. Some companies allow employees to charge travel to personal credit cards and retain airline points for personal use. And airline points you earn on the job are not a taxable benefit. Also, if you are going somewhere interesting and your hotel room is paid for, you may be able to take your family along on a vacation for a fraction of the normal cost.

Do you have tips for employees to maximize their use of employee benefits? Share your tips with us at http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.

If you would like to send us other money saving ideas, here are the themes for the next three weeks:

06-Oct Seniors Colleges, universities offer free tuition for seniors
10-Oct Thanksgiving Paying it forward: Volunteer opportunities
17-Oct Halloween Cheap and cheerful costumes, snacks