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NB Telegraph-Journal ~ The Bottom Line ~ CPP Bills ~ May 22, 2006 - 29 May 2006 by TaxHelp
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Here we are at the unofficial start to summer. While May 24 is the actual birthday of the Sovereign for whom it was named, Victoria Day signals the beginning of the lazy, and hopefully hazy days of summer. Often portrayed as one who could relate to the middle class, she would have been happy to hear of the social importance of the Canada Pension Plan.
Begun in 1966, the CPP was designed as a standardized program to provide benefits to workers, so that they may call upon an annuitized source of funds when needed. Premiums are paid from employment earnings at the rate of 4.95 per cent with the first $3,500 of income exempted. In 2005 the maximum contributory earnings was $41,500, thereby setting a maximum payment of $1,861.20. Employers are also required to contribute with matching dollars so that those individuals who are self-employed are required to offer up 9.9 per cent.
While the following is dry reading, it does serve a purpose later in the story. The premiums that are paid are accounted for on your personal tax return. In fact, one takes a non-refundable credit for the amount, and this has the ultimate effect of lowering the amount a taxpayer owes. Any overpayment is directly refunded on page four of the return. Put another way, it is likely that someone who has two employers in a year and earns $25,000 from each will have overpaid. The maximum pensionable amount is $41,500 and the individual has earned $50,000. In this case it wouldn’t be unreasonable to see that the totals payments through both employers could be $2,061.20 – an overpayment of $200. The taxpayer would take the credit of $1,861.20, lowering his tax bill by about $465 and also have the remaining $200 directly refunded as well.
The Canada Pension Plan offers three different benefits, all of which are taxable to the recipient. The one we are most familiar with is retirement. Generally these benefits start for plan participants at any time between the age of 60 and 70. The earlier you take it, the less you receive. For those who elect to receive benefits at the normal retirement age of 65, the maximum payout is just under $845 a month. Members can choose to split this income with spouses. Those in receipt of CPP payments are exempt from contributing, so the premiums I spoke of earlier are prorated in the year of received payments. As an example, someone who retires in June and begins to receive CPP in July is subject to a maximum contribution of half of the $1861.20 since he was on CPP for the other half of the year. The last piece of the puzzle is that any employment income earned while on CPP is exempt from contributions.
A second benefit that many people are aware of is in the area of death. Survivors are entitled to a one-time lump sum benefit upon the death of a member normally in the amount of $2,500. Additionally there is a monthly payment in the neighbourhood of $500 depending on age, and there is also a monthly payment for each dependant child of the deceased contributor of $200.
The last benefit is paid in the event of disability, and this is the heart of today’s piece. The disability benefit is about $1,030 a month. It is difficult to qualify for and as a result often takes a lengthy time to adjudicate – even years. If the Plan finds in favour of the applicant, a cheque is issued to cover the retroactive payments going back to the start of the disability.
Regular readers know that, under the Fairness Legislation, taxpayers can elect to have returns adjusted for a period of ten years. However, CPP overpayments can only be refunded within a four year period. The Canada Revenue Agency in their vigour to insure accuracy has been revisiting these retroactive payments with an eye to make the correct proration. Normally this would be cool. If someone was ruled disabled in July of 2003, the reassessment would lower the CPP contribution requirement by half. This would have the effect of increasing the taxes due, since there would be less non-refundable credit. However, the reduced half would be directly refunded and after the taxes and interest were deducted, affected taxpayers would probably be in receipt of a cheque for a couple of hundred bucks, depending on income.
The program period was constructed in error unfortunately. The CRA has been generating reassessments beyond the statute of limitations, with taxpayers receiving bills as a result. In one case we saw earlier in the year, someone had been reassessed on the 1998 tax year. The prorated reduction resulted in an additional tax liability of $50. There was another $70 of unpaid interest. However, the CPP overpayment was not able to be refunded because of the specific limiting period. This amount would have been about $200 plus interest – more than enough to pay the balance due and refund a week’s worth of grocery money – an important factor for anyone, but especially someone on a fixed income.
Anyway, the CRA has acknowledged that these reassessments have been issued in error and they are reversing them. If you have received an unexpected bill as a result of a CPP payment, you may want to enquire as to its validity. And in the meantime, enjoy the regal day off.
Roger Haineault is with Help 4 Taxes. He can be reached with specific questions or suggestions by calling 506-693-1212 or by e-mailing him at roger@help4taxes.ca. His column appears Mondays. |
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