455 Avenue Road, Suite 100, Toronto, Ontario, M4V 2J2

Tel: (416) 966-9675 Fax: (416) 966-9677


CALU INFOexchange 2008, Volume 3

September 10, 2008

In this edition of INFOexchange, CALU member Florence Marino brings members up-to-date regarding recent developments that have changed the tax landscape for CCPCs and their shareholders. In addition, Ted Ballantyne reviews a recent tax case dealing with the tax treatment of a refund of premiums on a life insurance policy, provides his thoughts on the need to consider post-retirement employment as part of retirement planning discussions, and gives a brief update on creditor protection regarding the extension of protection for RRSPs and RRIFS to DPSPs. Also in this issue is a tax update from Moodys LLP on Personal Services Businesses; and information regarding standardized definitions for 26 critical illness conditions.

CALU thanks all who contributed to this edition of INFOexchange.

Paul McKay, CAE

Table Of Contents

Eligible Dividends - Another New Landscape[1]


The preferential tax treatment for "eligible dividends" was originally introduced to "level the playing field" between income trusts and traditional corporations.[2] Other measures that specifically targeted income trusts were also introduced.[3] The goal of the eligible dividend measures was to lower tax on corporate distributions of active business income which was subject to the general corporate tax rate. The mechanism to accomplish this was to increase the gross-up and dividend tax credit applicable to eligible dividends. From the perspective of Canadian controlled private corporations (CCPCs), the advent of eligible dividends came with a significant compliance burden and greater complexity which requires tracking of the "general rate income pool" (GRIP).
Since these measures were put in place,[4] further federal tax changes have been made which once again change the tax landscape for CCPCs and their shareholders. This article will address the changes brought about by the Federal Economic Statement dated Oct. 30, 2007[5] (the "Statement") and the further changes to the gross-up and dividend tax credit announced in the 2008 federal budget[6] including subsequent consequential changes to the GRIP calculation announced on July 14, 2008 (referred to herein as the "July 2008 Proposals").[7] It will also reflect the movement of the provinces in relation to these changes in their 2008 provincial budgets. The impact on planning generally and in respect of corporate-owned life insurance specifically will be discussed in light of these changes.[8]

The Statement

The Statement delivered significant corporate tax rate reductions over a four year period of time. The following chart shows the general corporate rate by province[9] in 2007 and 2012. Income taxed and retained at the corporate level at this rate generally is what enables the payment of eligible dividends from CCPCs.

The combined effect of the original eligible dividend measures and the significant decreases in corporate tax resulted in the following general planning considerations: in most provinces shareholders in CCPCs would shift their preference from receiving capital gains to receiving eligible dividends,[10] and the propensity to keep profits at the corporate level and not to "bonus down" would likely become the norm for CCPCs.[11]

The federal government did suggest that there may be some further adjustments to the gross-up and dividend tax credit for eligible dividends in light of these significant decreases in corporate tax rates when the Statement was released.[12] Notwithstanding the warning, it is still significant to see just how much changed largely as a result of the "adjustments" announced in the 2008 federal budget.

2008 Federal Budget

The 2008 federal budget changed the gross-up and dividend tax credits applicable to eligible dividends. The effect of these changes increased the rate of tax on eligible dividends from their previous levels. The following chart illustrates where eligible dividend tax rates were expected to be by province in 2012 before the 2008 federal budget measures and afterwards:

General implications:

a) Capital gains vs. Eligible dividends

As a result of the 2008 federal budget changes, in 2012 it will be more favourable to receive capital gains than eligible dividends in all provinces for taxpayers in the top tax bracket. Where the taxpayer is paying tax at the top marginal rate, the difference ranges from a low of 1.35% in favour of capital gains in Alberta, to a high of 10.29% in favour of capital gains in Newfoundland and Labrador. This has implications for structuring the sale of a business (preference for share sale by the vendor as capital gains are preferred); for post-mortem planning capital gains producing transactions (e.g. pipeline and 88(1)(d) bump strategies) preferred over dividend producing transactions (e.g. redemption and 164(6) loss carry back strategies) in circumstances where no capital dividends are available.

In looking at buy-sell agreements it may be wise to keep options flexible so that the most appropriate, tax effective method of buy-out can be determined at the operative time. It is possible that the provinces may make further adjustments to their gross-up and dividend tax credit mechanisms provincially which could further change the landscape.[15]

b) Bonus down vs. retain and later pay out eligible dividend

Prior to the 2008 federal budget, in most provinces (by 2012) there would be a tax savings (or minor tax cost) to a CCPC retaining active business income subject to the general corporate tax rate and later paying out such income as eligible dividends (vs. paying out such income as a bonus to the shareholder/employees). As a result of the 2008 federal budget, no provinces are in a tax savings position by 2012 and those that had a tax cost prior to the 2008 federal budget changes, are in a higher tax cost position. And as a result of the July 2008 Proposals, the tax cost positions in 2012 will be slightly lower, but still higher than what would have been the case before the 2008 federal budget measures.

Even with provinces all being in a tax cost position, given the significant tax deferral (with general corporate tax rates ranging from 25% in British Columbia and Alberta to 31% in Prince Edward Island and Nova Scotia), the question will be: how long is the retained surplus expected to remain at the corporate level before distribution from the CCPC? By 2012, the deferral (i.e. the difference between the general corporate tax rate and the highest marginal tax rate personally) ranges from 14% in Alberta to 21.32% in Quebec. The tax cost associated with retention may be minor compared to this significant deferral. The following chart shows tax cost or savings for 2012 based on expected tax rates as they were pre-2008 federal budget, post-2008 federal budget and post-July 2008 Proposals[16]:

The general conclusion is that despite the tax changes in the 2008 federal budget, CCPCs may still be more likely to retain corporate surplus than bonus down to shareholder/employees in most provinces.

Implications for Corporate-owned Insurance Planning

The changes brought about by the 2008 federal budget have not changed the basic conclusions relating to corporate-owned insurance planning. Some of the more notable conclusions in specific contexts are explored below.

Buy-Sell/Business succession

Life insurance is an effective vehicle to fund buy-sell obligations and business succession plans. This has not changed. Shifting preferences between capital gains and eligible dividends will not as dramatically impact the choice of buy-sell method where life insurance funding is in place. This is due to the tax benefits created by the payment of capital dividends made possible by life insurance proceeds.; However, agreements may wish to provide the flexibility for the parties to elect varying structures depending on the tax effects of each method for the parties taking into consideration such things as: desire/ability to use a spousal roll and redeem strategy; availability of the capital gains exemption; the ability to pay capital dividends, eligible dividends, ineligible dividends or some combination of these.

The structure for a buy-out where insurance is not in place may shift more closely with changing preferences for capital gains vs. eligible dividends. As a result, flexibility to consider the approach to the buy-out at the operative time would make sense. Funding with insurance would only improve the tax position of the parties since this would give rise to the ability to pay capital dividends to the extent of any capital dividend account balance.

Insurance Funded Owner-Manager Retirement Options

As time goes on, retirement compensation arrangements (RCAs) keep making less and less sense for the owner-manager. With corporate tax rates decreasing, the general propensity to simply retain funds at the corporate level and pay tax at 25%-31% vs. bonusing down (and pay tax at 39%-48% in a shareholder´s hands depending on the province) applies equally to refundable tax (50% paid in respect of RCA contributions by the corporation). Just because it´s refundable, doesn´t mean it can be ignored. It is only refundable when income is paid out of the RCA (and tax is paid by the owner-manager at 39%-48% assuming he or she remains in Canada). Either way you slice it there is a significant tax deferral opportunity with lower general corporate tax rates.

Life insurance strategies can capitalize on the fact that there will be more trapped surplus in CCPCs to provide for an owner-manager´s retirement planning. Corporate-owned insurance leveraged to pay eligible (or even ineligible) dividends to an owner-manager in retirement years can provide higher levels of after-tax income to an owner-manager than insurance-funded RCAs.

Insurance for Remaining Capital Gains Tax Liabilities

More retained corporate earnings may result in higher share values on the death of an individual owning shares in a CCPC. Life insurance to fund remaining tax liabilities can be held individually or corporately. Cash-flow producing insurance strategies (like corporate-owned life insurance leveraged to pay eligible dividends) can provide the funding for serial redemptions (for "wasting freezes") and cover remaining tax liabilities on death for shares that remain.


Some commentators question if the eligible dividend rules will survive.; But at least for the foreseeable future these rules cannot be ignored. As is evident from the foregoing discussion, these rules significantly complicate the estate and business succession planning for shareholders of CCPCs. Careful planning is required to ensure that shareholders of CCPCs retain the flexibility to optimize the benefits of these rules, now and in the future.


[1] Substantial portions of this article are reprinted with permission of Federated Press. These first appeared in (2008) 14 Insurance Planning 907. This article updates and modifies the original article.

[2]; Department of Finance News Release 2005-082, Nov. 23, 2005.

[3] On Oct. 31, 2006, Minister Flaherty announced measures imposing a distribution tax on income trusts. Draft legislation was released on Dec. 21, 2006, followed by a period of consultation. Income trust distribution tax was implemented in Bill C-52, Budget Implementation Act, 2007 which received Royal Assent June 22, 2007. Technical amendments were announced by the Department of Finance in news release 2007-106 Dec. 20, 2007.

[4]; Bill C-28, Budget Implementation Act, 2006, No. 2, received Royal Assent, Feb. 21, 2007.

[5]; Bill C-28, Budget and Economic Statement Implementation Act, 2007 received Royal Assent on Dec. 14, 2007.

[6]; Bill C-50, Budget Implementation Act, 2008, received Royal Assent, June 18, 2008.

[7]; Legislative Proposals and Explanatory Notes relating to the Income Tax Act, the Excise Act, 2001 and the Excise Tax Act released by the Department of Finance, July 14, 2008.

[8]; For a discussion of the impact of the original legislation on eligible dividends refer to Florence Marino, (2006) 12 Insurance Planning 790.

[9]; Provincial rates are current as of May 20, 2008, and include the 2008 Provincial budget information for all provinces.

[10]; By 2010, it was expected that only Manitoba, Quebec, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador would have had eligible dividend tax rates higher than capital gains tax rates.

[11]; In most provinces there would have been a small tax savings by 2012 for retaining income at the corporate level and later distributing as an eligible dividend. Only Quebec, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador would have a tax cost, and even in those provinces the tax cost was to be minor (highest was 5.09% in Newfoundland and Labrador). In addition, special considerations also applied in Ontario because of the provincial small business deduction "claw back" which would increase corporate tax rates in respect of income above the small business limit up to a certain threshold. For companies within this income range, there would be higher corporate tax rates that would reduce the tax deferral and increase the tax cost for retaining income within those thresholds. This would likely have lead Ontario companies to continue to bonus down to the small business limit as opposed to retaining income at the corporate level.

[12]; Explanatory notes to the Notice of Ways and Means Motion for the Economic Statement released Oct. 30, 2007 stated as follows: "Budget 2006 legislated an enhanced dividend tax credit (DTC) to ensure that the combined corporate and personal income tax rates on dividends from large corporations is comparable to that on other forms of income. The enhanced DTC measure was established with reference to the total average 2010 federal-provincial corporate tax expected at the time. As a consequence of the corporate income tax rate reductions announced in this Economic Statement, consideration will be given to adjustments to the enhanced DTC to ensure the appropriate tax treatment of dividend income, as well as adjustments to other rules in the Income Tax Act that assume a specific underlying corporate income tax rate."

[13]; This rate reflects 2008 British Columbia provincial budget dated Feb. 19, 2008.

[14]; Based on the current Ontario legislation, Taxation Act, 2007, S.O., c. 11, s.13, the Ontario dividend tax credit is calculated as a percentage of the federal dividend tax credit. Due to the change in the federal dividend tax credit from the 2008 federal budget, the Ontario rate changes. This is reflected in the chart. However, Ontario Finance has indicated (2008 Budget Papers, Chapter III: Tax Support for Families and Business) that it "proposes to maintain its plan to increase the tax credit on grossed up eligible dividend from 7% in 2008 to 7.4% in 2009 and 7.7% in 2010 and subsequent years." If this comes to pass, then the rate for 2012 would be 26.74%. At the time of writing this intention has not yet been implemented. It should be noted that the current legislation of all provinces except Manitoba and Quebec also calculate the dividend tax credit for provincial purposes as a percentage of the federal dividend tax credit or gross-up. The rates in the above table reflect this. It is possible that these provinces may also implement changes like what was expressed as the intention in Ontario.

[15]; At the time of writing, all 2008 provincial budgets have been reflected. British Columbia´s was the only provincial budget which came down before the federal budget so it obviously did not contemplate the 2008 federal budget. Also, there is some indication in Ontario that further changes to the calculation of the dividend tax credit will be made. See note 14.

[16]; This chart assumes all available after-tax income taxed at the general corporate rate is distributed to the extent possible as an eligible dividend using the GRIP generated and then the rest of the available after-tax income is distributed as an ineligible dividend. It also assumes that there is no GRIP balance additions other than that generated by active business income taxed at the general corporate rate. Since this addition was to be calculated using 68% of the corporation´s full rate taxable income it inherently assumed a corporate tax rate at the provincial level of 32%. (This assumption is reflected in the "Pre-2008 Federal Budget" and "Post-2008 Federal Budget" columns of this chart. The extent to which a province´s tax rate varies from that assumption affected the tax cost or savings calculated. As discussed, all provinces are expected to be below 32% by 2012. The lower the corporate rate was below 32% the larger the ineligible dividend component of the total dividend will be when corporate profits, net of income tax, are distributed from the corporation, thereby increasing the personal tax payable and the "tax cost" as calculated above. Given that the corporate tax rate reductions will steadily reduce corporate tax rates over time, it was plausible that this (68%) percentage was going to be revisited so as to address this. This is precisely what happened with the July 2008 Proposals, the column indicated reflects a 72% rate which implies an inherent general corporate rate of 28% in 2012.

[17]; This chart assumes the eligible dividend tax rate in accordance with current Ontario legislation. See note 14 for more details. For the intended Ontario tax rates, the tax savings would have been 1.25% for 2012 reflecting the pre-2008 federal budget rates and there would be a tax cost of (1.71%) for 2012 reflecting the post-2008 federal budget rates. Also, this ignores "claw back". If within "claw back" range the tax costs would increase to (1.78%) and (7%) respectively under current Ontario legislation, and (1.78%) and (4.7%) respectively under intended Ontario legislation.

[18]; Subsection 89(1) definition of "capital dividend account" of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supplement), as amended.

[19]; See David, Louis, "Eligible Dividends - A Prediction", Tax Planning for Small Business, May 2008 Number 30 pp. 5-7.

Creditor Protection Update

On July 21, 2008, I sent an e-mail to members advising that the amendments to the Bankruptcy and Insolvency Act that extended creditor protection to all RRSPs and RRIFs came into force at the time that the regulations setting out protection for employees for unpaid wages came into force on July 7, 2008. Those regulations also make it clear that deferred profit sharing plans are included in the same provisions that protect retirement savings vehicles from seizure. This provision is subject to a possible claw back of contributions made in the 12 months prior to bankruptcy, subject to any overriding protection under provincial legislation (e.g., insurance legislation).

For readers who wish additional details, a PDF copy of the Canada Gazette, Part II of July 23, 2008 may be found on the web at http://canadagazette.gc.ca/partII/2008/20080723/pdf/g2-14215.pdf. The relevant regulation starts on page 1737.

Ted Ballantyne, BBA, LLM, CMA, TEP, Director, Advanced Tax Policy, CALU/p>

From the Courts: Tax Treatment of ROP Rider on Life Policy at Maturity

By Ted Ballantyne, BBA, LLM, CMA, TEP, Director, Advanced Tax Policy, CALU

A recent tax case, W. Ross White v The Queen (2008 TCC 414) confirms that a life insurance policy which has a Refund of Premiums (ROP) rider that provides for the full refund of premiums, policy fees and premiums for the rider (without interest) on either death or maturity is taken into account in determining the taxable policy gain at maturity of the contract. (Note: If paid on death, it would form part of the death benefit and would not be taxable.)

The original contract was issued by the Canadian General Life Insurance Company on Sept. 16, 1983. The policy was subsequently taken over by Westbury Life and then, as a result of a corporate amalgamation in July 2000, RBC Life Insurance Company (RBC Life) became the life insurance carrier, but the terms of the contract remained otherwise unchanged. The policy contained the following provision, which was the basis of the tax case:

Refund of Premium - This rider (ROP) provides for full refund of accumulated premiums, policy fees and premiums for the rider (without interest) upon death or Age 70.

For 2005, the taxpayer filed his tax return reporting total income of about $21,200 from primarily OAS, CPP and pension income from employment. The CRA reassessed the return and added $24,909 to the taxpayer's income in respect of the surrender of the life insurance policy in question in September 2005. The taxpayer appealed using the informal appeal procedure.

The taxpayer also contacted RBC Life in December 2006 following receipt of the Notice of Reassessment. RBC determined that the T5 slip issued for the 2005 taxation year overreported the amount of taxable gain. The T5 should have been for $23,888.04 instead of $24,909. The reason for the difference was that the premiums under the policy were modified a number of times over the course of the contract and some of those modifications were not properly reflected in the cumulative premium calculation. As a result, the policy gain calculation needed to be modified and an amended T5 was issued. The court accepted the modification.

The calculation of the proper taxable gain on disposition of the policy is as follows:

Sum of Premiums paid excluding Double Indemnity and Waiver of Premium Benefits - $22,090.37

Less: Total NCPI (net cost of pure insurance) - 21,069.17

Policy ACB (adjusted cost basis)- 1,021.20

Amount of Disposition - 24,909.20

Less: Policy Adjusted Cost Basis (ACB) - 1,021.20

Reportable Gain on Disposition - $23,888.04

From the Court case summary it is apparent that the term "Return of Premiums" causes some confusion. While the policyholder did indeed pay an extra premium for this benefit it would be presumed, based on the term, that the policyholder is simply receiving back the premiums paid - either as a part of the death benefit or at the maturity of the policy.

Herb Huck, RBC Life's Director of Advanced Marketing and Distributor Relationships (and a CALU member), was subpoenaed by the Crown as a witness. Mr. Huck explained that the insurer must pay premium taxes to the province (in this case Ontario) as well as commissions to the financial advisor, along with incurring certain administrative charges, such as medical examinations, collecting premiums, mailing premium notices, etc.

The return of the premium benefit is provided by the insurer by charging policyholders an extra premium for this benefit. The extra premiums along with any investment growth in and of themselves are not sufficient to fund this benefit so the benefit is subsidized by other policyholders who either surrender their contracts prior to maturity or let their policies lapse.

The specific provisions in the Income Tax Act (the "Act") of relevance here were paragraph 56(1)(j), which requires the amount determined in accordance with subsections 148(1) or (1.1) to be taken into income, along with the requirements of section 148 and in particular subsection 148(1), and the definitions of "adjusted cost basis" and "proceeds of disposition" found in subsection 148(9).

As a result of looking at the specific provisions of the Act the Court found that the taxpayer must include in income the amount of the policy gain - $23,888. Accordingly, the taxpayer's appeal was allowed in part only insofar as reducing the amount of the gain from the original reported amount of $24,909 to $23,888, which was the correct amount of the policy gain on disposition.

However, the Court went on to share its frustration over the use of the term "return of premiums" to describe the supplementary benefit. As the premium was paid with after-tax dollars, it was reasonable to assume that a "return of premiums" benefit would also be non-taxable. But that was not the case; the "return of premiums" benefit was in fact a share of income earned by the insurer over the 22-year term of the policy. The share of income was either going to be taxed in the hands of RBC Life or in the hands of the taxpayer and because the taxpayer received it, it was taxable to him.

It is worthwhile to look at the comments of the presiding judge, at paragraph 24:

In my opinion, the phrase "return of premium" may be an accurate description of the maximum amount received by the Appellant upon the expiry of the term but it is misleading for the following reason. A very large portion of all premiums paid by the Appellant was for life insurance. He had full value for that very large portion of premiums because his life was insured for 22 years. Therefore, it is not reasonable to think of the insurer as paying back (upon the expiry of the term) any of the premiums for which it had already provided full value. What the insurer paid as a benefit upon the expiry of the term was not, in a business sense or in an income tax sense, any part of the premiums for life insurance. It was something else. It was part of the insurer's earnings. Under subsection 148(1), it was income.


While it may appear the outcome of this case is obvious - the taxpayer is taxed on any gain resulting from the disposition of a life insurance policy - which in this case includes the refund of premiums paid on maturity of the contract; this case may also have other, less obvious, implications.

The policy in question was issued in September1983. This was during what might be referred to as a "grey period" following the November 1981 budget, in which were proposed significant changes to the tax treatment of life insurance policies, but prior to the new exempt test regime being finalized. While the maturity of a life insurance policy has been considered to be a "disposition" for income tax purposes since 1968, it was not until 1978 that the definition of "proceeds of disposition" was added to the Act. But at that time there was no grind to the ACB of the policy in respect of the net cost of pure insurance, thus the cost base of policies issued prior to Dec. 2, 1982, would have been higher. As well, there were no court cases during that period (at least that the author is aware of) which dealt with the issue of what legally constituted proceeds of disposition.

The current exempt test regime came into effect for policies issued after Dec. 2, 1982, but it is the author's (admittedly somewhat fuzzy) remembrance that the final details of the exempt test regime did not become law until late in 1983. At the time that the policy was issued, the exact state of the exempt test proposals, and thus the taxation of the policy and its refund of premiums, may not have been clear.

While this is a historical perspective on a policy issued 25 years ago, it highlights a current debate over the tax characterization of a "refund of premiums" in different situations. This case deals with a life insurance policy where the tax rules very specifically require the computation of a net cost of pure insurance amount and adjust the ACB of the policy accordingly, regardless of whether the premiums purportedly being refunded are just that, or a separate life insurance benefit funded by a portion of the premiums paid.

Many critical illness and long-term care insurance policies (and disability insurance policies to perhaps a lesser extent) also contain "refund of premiums" provisions during lifetime or at maturity. While premiums for refund of premium at death are generally included in the base premium, there is generally an explicit extra premium benefits payable during lifetime. As with life insurance policies, a portion of the premium under living benefit contracts are used to pay commissions to financial advisors and to pay administrative costs incurred by the insurer. As well, if policies lapse or are surrendered prior to maturity, the premiums paid in respect of "refund of premiums" benefits go to subsidize the refund of premiums paid to policyholders who maintain their contracts. However, unlike life insurance policies, it is unclear which, if any, provisions of the Act apply to critical illness and long-term care contracts.

As members may know, the Canadian Life and Health Insurance Association (CLHIA) and CALU made a submission in 2004 to Finance Canada as a prelude to discussions on the appropriate tax treatment of critical illness and long-term care insurance, but to date detailed discussions have not occurred. In the case discussed in this article the judge concluded that the term "refund of premiums" was misleading in that, while an amount equal to the aggregate premiums paid by Mr. White to RBC Life was in turn paid to Mr. White by RBC Life, the amount represented, at least in part, earnings of the life insurer. Could the same rationale be applied to refund of premium benefits on living benefit contracts?

In looking at the possible tax treatment of refund of premiums during life time or at maturity under living benefit contracts, perhaps a rose (or ROP) by any other name might not smell as sweet!

Copyright the Conference for Advanced Life Underwriting, September 2008

Retirement Planning: Expectations and Reality

In the following commentary, CALU's Director, Advanced Tax Policy, Ted Ballantyne, reviews a recent U.S. advisor survey and Statistics Canada data observing that, on either side of the border, there may not be enough attention paid to retirement income realities.

As fall approaches and members start to gear up for another RRSP season, a study published in the National Underwriter's Income Planning August 2008 electronic newsletter (Vol. 4, No. 13) has some interesting findings. According to researchers at Curian Capital LLC of Denver, Colorado, about 90% of advisors say 80% of their clients have too little to retire on. Thirteen hundred independent advisors were surveyed. According to the article, dated Aug. 4, 2008, other survey findings included:

For 42% of the participating advisors, retirement savings planning and accumulation is the top priority.

For 31% of the advisors, income planning is now the top priority.

In addition, the results of a previous reader poll indicated that, when discussing retirement planning with clients, the possibility of a job after retirement should always be discussed with clients (46%) or should be discussed when reviewing all options (40%). In other words, 86% of the National Underwriter reader poll participants felt that post-retirement work could form part of their clients' retirement plan.

Sad commentary indeed as concerns the ability of Americans to save for retirement. Couple that with the recent recommendation by the American Association of Actuaries (AAA) that the United States should strengthen the Social Security old age pension system by increasing the normal retirement age to age 70. The following three paragraphs are excerpted from an article by Allison Bell "AAA: Raise the Social Security Retirement Age" referred to in the same issue of Income Planning.

"The AAA stated that '[A]s life expectancy increases, the percentage of workers' lives spent in retirement continues to grow, while the number of working years stays relatively constant,' says the AAA. 'Inevitably, Social Security's costs will exceed what its scheduled financing will supportÉ. While Social Security's financial soundness could be restored in many different ways, we believe that any solution package should include increases in the retirement age.'

"Simply speeding up an ongoing effort that is increasing the normal retirement age for Social Security to 67, from 65, one month at a time could cut the projected program deficit 10%, according to AAA projections.
"Keeping the current schedule of normal retirement age increases to age 67Ñand then continuing to increase the normal retirement age by 2 months every year until it reaches age 70Ñcould cut the projected deficit 50%, the AAA estimates."

Unfortunately for Canadians, things might not be much better, at least looking at the median amount (the amount halfway between lowest and highest) in RRSPs. According to the Statistics Canada's February 2008 issue of Perspectives on Labour and Income, six out of 10 families held RRSPs with a median value of $25,000.

The median value varied by age group, as might be expected. Younger families, where the main breadwinner was aged 25 to 44 had a median RRSP value of $15,000 while for those aged 45 to 54 had a median RRSP value of $40,000 and for the group aged 55 to 64, the median value was $55,000. However, for seniors age 65 and older, the median value fell to just $37,000 - probably because the RRSPs were being matured.

On the plus side, close to 75% of families had an employer-provided pension or an RRSP.

While it is good news that the majority of Canadians have some form of retirement savings, the median amounts reported are very low.

Canada Pension Plan funding, according to the Canadian Institute of Actuaries, is now on sound footing and the claw back of Old Age Security benefits for those who have "too much" retirement income, while not palatable from a financial planning perspective, does ensure that OAS benefits are targeted to those who need subsidized income in retirement more than others.

The issues raised in the August issue of the National Underwriter's Income Planning, coupled with the apparently low median savings by Canadians in RRSPs raises questions as to whether simply encouraging clients to save for retirement is sufficient, or whether advisors need to be more pro-active in discussing in detail a client's post-retirement plans. Perhaps, as appears to be the case in the United States, advisors should be talking to clients about continuing to work, in some fashion, following retirement, in addition to simply trying to accumulate funds in an RRSP. Such a conversation may force clients to either re-evaluate post-retirement plans or to increase current retirement savings to ensure that their post-retirement plans can become a reality.

Copyright the Conference for Advanced Life Underwriting, September 2008

Practice Management: CI Benchmark Definitions

The April 2008 issue of The Living Benefit, published by Munich Re, provided details of standardized definitions for 26 critical illness conditions that it is hoped the industry will adopt over the coming months. A PDF copy of The Living Benefit newsletter has been posted to the CALU members' only website (www.calu.com) with the permission of Munch Re.

According to Munich Re's Director of Marketing, Helene Michaud, "The members of the committee brought a wealth of expertise from underwriting, medical, actuarial and marketing fields and represented over 80% of the Canadian CI market in terms of new business premiums.

"Advisors have been identifying differences in CI definitions as adding complexity to the product and as a barrier to entry to sell CI insurance. This initiative was undertaken in an effort to alleviate this barrier and grow the CI market. Although definitions are already similar in Canada, introducing the concept of benchmark definitions should improve advisors' perceptions about CI and encourage them to offer CI to their clients.

"One of the objectives of this industry committee was to update the definitions for certain CI conditions which no longer accurately reflected the covered conditions, current practices or diagnosis processes. The second objective was to establish consistent wording for the industry when a condition intended to cover the same risk.

"The review of the definitions led to more updated, clear and consistent wording in the industry. It should be noted that overall the definitions have not been liberalized or reduced; rather they define the intent of the covered conditions more precisely. In addition to helping advisors and policyholders better understand the product, this will improve the overall claims adjudication process."

Copyright the Conference for Advanced Life Underwriting, September 2008

Tax Update: Personal Services Business - Be sure before concluding that the PSB rules do not apply

The following article is reprinted with permission of Moodys LLP Tax Advisors: The Tax Specialist Group Tax Tip 08-08, dated Aug. 15, 2008. Please note that references in the following article to "you" and "your" refer to tax professionals, not other professionals.

With corporate tax rates declining and small business deduction limits increasing, practitioners are probably receiving more enquiries regarding how clients can provide personal services through a corporation.
Clients should be reminded that, even though tax rates may make a corporation seem desirable, the CRA has not changed its view on what constitutes a personal service business (PSB).

The exclusions from the PSB rules for corporations that employ more than five full-time employees, or which receive payment from associated corporations, are the only two legislated exemptions from the PSB rules.

If a corporation is viewed to be a PSB, no small business deduction is available in respect of that personal service business income. Furthermore, the corporation is only entitled to deduct expenses that an employee would be entitled to deduct, as well as salaries paid to the "incorporated employee."

The recent case of 1166787 Ontario Limited ("PSB Co.") versus R. (2008 TCC 93) confirms that nothing has changed in this area and adds the awarding of costs to the equation.

In this case, PSB Co. was required to prove that its employee ("Ms. Lee") should not "reasonably" be regarded as an officer or employee of a person or partnership to whom or to which the services were provided, but for the existence of PSB Co.

The main test in this area is determining whether a "reasonable" person would view the individual providing the services to be an employee or an independent contractor with respect to the work provided to the payor.

While the case dealt with the determination of personal service business status, the same analysis applies to the determination of employee versus independent contractor. In this case, Justice Miller confirmed that "The only issue to be decided in relation to the definition is whether Ms. Lee would reasonably be regarded as an officer or employee of [the payor] but for the existence of the Appellant." The facts were not contested and the conclusion reached by the court, that PSB Co. was a PSB, is not surprising. The court's awarding of costs to the Crown, however, provides an interesting twist.

While your clients may not want to heed your advice regarding PSB or independent contractor status, the possible awarding of costs to the Crown increases a client's exposure. Add these costs to the double tax created when the small business deduction is denied (even with GRIP), additional tax from disallowed expenses and interest on underpaid taxes and an aggressive client is entering into an expensive proposition.

It is important to make sure that you and your clients are well informed before concluding that the PSB rules do not apply, or that your client is an independent contractor.

Copyright the Conference for Advanced Life Underwriting, September 2008