Last week the CRA issued the draft version of T4217 - Payroll Deductions Formulas for Computer Programs - 88th Edition - Effective January 1, 2009. This obscure document provides the details of the tax brackets and rates applicable to 2009. The indexation factor that applies to federal amounts is 2.5% for 2008. For the various provinces, the indexation factor varies from 0% for provinces who do not apply indexing to their rates and amounts to a maximum of 3.8% in Alberta.

Tax rates remain at the same levels, but the brackets have been indexed by 2.5%

The maximum pensionable earnings under the CPP (Canada Pension Plan) for 2009 will increase from $44,900 to $46,300. This translates to a maximum employer and employee contribution in 2009 of $2,118.60, increased from a maximum of $2,049.30 in 2008.

The basic exemption of $3,500 will remain the same in 2009 as will the contribution rate of 4.95%. The self-employed rate of 9.9% will also remain unchanged for the year.

Employment Insurance Premiums for 2008 and 2009

The maximum insurable earnings for Employment Insurance purposes increase to $42,300 but the premium rate remains at 1.73% for a maximum annual premium of $731.79 for all provinces (up from $711.03) except Quebec where it is reduced to 1.38% for a maximum premium of $583.74. For 2009, the maximum earnings for the Quebec Parental Insurance Plan (QPIP) are $62,000 with a rate of 0.484% for a maximum annual premium of $300.08.

But it's not all bad news: if you have cash you may be your bank's new best friend

An editorial by Evelyn Jacks

Last week, Desjardins Securities issued a news release stating the obvious when it comes to pension funding in Canada: corporate pension plan funding levels have hit an all-time low thanks to plunging stock markets, leaving company plans with assets worth just 72 per cent of their obligations under current conditions.

Stats Canada agrees. In a report issued in July 2008, it was noted that since the beginning of 2000, under-funding of defined benefit pension plans have required employers to do a number of things including adding defined contribution components to their existing defined benefit plans, and injecting money into defined benefit plans to ensure adequate funding. In fact, in 2006 employer contributions accounted for 72% of total contributions to RPPs, up from 70% in 2005, and those increases came mainly from special payments for unfunded liabilities and solvency deficiencies, which increased by 44% at that time.

Now, because more than 60% of large corporations' pension assets are invested in equities, according to Standard & Poor's analysis, the problem is even worse. Their senior analysts predict that even if equity markets remain flat for the remainder of 2008, defined benefit plans may end up with a combined under-funding well in excess of the record $219 Billion experienced in 2002.

Companies are facing massive expenses as a result of equity valuation declines of 20% and more. Executives at Boeing for example, estimate that the company's pension expenses could rise to about $1,000 in 2009, even though its pension was overfunded at the end of the third quarter this year.

Underfunding poses a significant threat to current and future pension receivers according to Mario Jametti at York University, who recently studied the problem, particularly for defined benefit plans. It is interesting to note this is of particular concern to Canadian women, who have been the sole reason for the increases in memberships in employer registered pension plans' growth since 2006. Membership was around the 6 million level in 2006, when 83% of women had a defined benefit plan, compared with 77% for men. The public sector accounts for only 10% of all registered pension plans, but the growth in membership appears to come largely from women working in the public sector.

The problem therefore is well documented, primarily due to the fact that boomers were to begin retiring en masse in 2010 or so, a decision that certainly is being rethought by many due to the current economic climate.

In fact according to Stats Canada, two-thirds of pension plans in Canada were in the red back in mid-2003. Both longevity as well as the decline in long-term interest rates have had a significant effect on the value of pension liabilities relative to the assets of the plan. Therefore, the problem is complex relating to the design, administration, and regulation of pension plans, according to Jack Selody, of the Legal Services Department at the Bank of Canada who authored a paper entitled Vulnerabilities of Defined Benefit Pension Plans back in May of 2007.

There are several consequences:

• Companies must fund pensions according to the rules within a regulated time period. To do so, revenues must increase or expenses must be cut. If they can't do it, individuals will face layoffs and this is already happening. Bankruptcy is the most severe consequence; everyone loses under this option.

• Governments can relax the rules for funding and/or guarantee pension benefits. This requires quick co-operation and plans of action, which are unlikely. Ontario is the only province in Canada which has created a Pension Benefits Guarantee Fund, but it only guarantees the first $1000 per month of pension benefits.

The Manitoba Pension Benefits Act and Pension Benefits Regulation, on the other hand, require an actuarial valuation of a pension plan to be performed at least every three years on both a going concern and solvency basis. Where the solvency ratio of the plan is less than .9 an annual valuation is required. Under the legislation the employer is required to fund unfunded liabilities revealed in a going concern valuation over 15 years and solvency deficiency revealed in a solvency valuation over 5 years. The legislation does not provide any general solvency relief due to the economic environment.

• Individuals must take responsibility for their own futures and shore up their retirement funding options with proper planning—the sooner the better.

So, it's back to Personal Finance 101 for investors. Time to see your tax and financial advisors to discuss projections for retirement income—and the younger you are the more effective this will be.

Remember also that 90% of Canadians underfund their RRSP contribution room. It's time to rethink that. In a world where people think nothing of spending $4 a day on coffee, remember this: invested inside a tax deferred plan that $1,460 you spend each year on coffee (yes, $4 x 365 is $1,460!!) will grow to about $8,300 in only 5 years . . . and that's without the initial double digit tax savings the RRSP contribution will produce! Seems like a no-brainer to cut down on the coffee (better for you too!)

Doug Nelson, financial advisor and lifecycle coach with the Knowledge Bureau, adds "perhaps we are all beginning to realize that the investment returns seen between 1982 and 2000 were well above the long term averages and that now we need to plan for more conservative long term returns and perhaps even a more modest lifestyle. This may be the beginning of redefining the 'normal retirement date' for most pensioners and the beginning of the end of full or partial indexing, two components that are a significant expense to most pension plans".

Nelson also emphasizes that most people inappropriately focus on their gross annual, before-tax income or their gross pre-tax investment returns when evaluating the strengths or weaknesses of their current financial situation. "Clients must begin to focus on after-tax income and after-tax investment returns. By doing so they will find that with some small changes they can receive significantly more after-tax income and have greater financial security with considerably less portfolio risk. In today's uncertain environment, it doesn't matter what you have, it only matters what you keep."

At the 2008 Distinguished Advisor Conference Nelson presented what has been referred to as "The Premier Retirement Planning Process in Canada". Doug is the co-author of the certificate course Tax Efficient Retirement Income Planning, which teaches the process to advisors.

The last word goes to Robert Ironside, Knowledge Bureau faculty member and course author, who adds some important wisdom to the pension funding issue:

"As the Canadian banks are reducing their level of funding in the money market, due to the current turmoil in the financial sector, they are very actively searching for personal deposits. If you have money to invest, you have just become your bank's new best friend. All of the Canadian banks want your term deposit and they are willing to pay you well for it. It is not often that you can obtain a return on a savings account that is higher than Prime, but today you can."

"Investors looking for a safe and secure haven for cash they might need over the next few years would be well advised to shop aggressively among the banks to see who will offer the best rate. Investors requiring periodic cash inflows could set up a laddered series of GIC investments to both match the need for periodic cash and capture the benefit of longer deposit periods."

In short, while we are seeing that our most trusted institutions and savings plans are under threat, there is also significant opportunity. To win in this environment, individuals and their advisors must step up and secure their own futures with proper planning, good health and high doses of productivity as the ultimate antidotes to the financial disease around us today.

Evelyn Jacks is President of The Knowledge Bureau, a leading educational institute teaching professional development and personal finance to investors and their advisors. Your comments are welcome. For more information visit www.knowledgebureau.com.

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Has your income changed since filing last year's return? If so, your eligibility for certain refundable tax credits may increase or decrease this year. Always monitor new benefit levels and "clawback zones"; that is, the income thresholds used to phase out your eligibility for the Working Income Tax Benefit (WITB), the Canada Child Tax Benefit (CTB), and GST Credit. Income distributed through these credits begins again in July 2009, if you file family tax returns on time and report net income (line 236 on the tax return of both spouses) within various clawback zones. Again, an RRSP contribution might help you maximize these credits, which can really help with cash flow throughout the year.

The Working Income Tax Benefit (WITB) is a refundable tax credit that can provide some tax relief for individuals and families that are employed in low income jobs. It also helps to encourage those not currently in the workforce to enter it by accessing the tax credit incentive.

Taxpayers could be eligible for the WITB if:

• They are 19 years of age or older at the end of 2008 and;
• They were a resident of Canada for income tax purposes throughout the year

Note that if the taxpayer was under 19 years old during the year and had a spouse, common-law partner or eligible dependant in 2008, they could also be eligible for the benefits.

Taxpayers are not eligible for the benefits if they don't have an eligible dependant and were enrolled as a full time student for more than 13 weeks in 2008 at a designated educational institution. Entitlement is also lost if they were confined to a prison or are not required to pay tax as an officer or servant of another country or are a family member of such a person.

All benefit levels and thresholds are indexed each year. Qualifying taxpayers must apply for the credit by filing a tax return and completing Schedule 6.

Individuals can apply to have 50% their current year's estimated WITB prepaid. Prepayments will be made on the same payment cycle as GST credits are paid but the entire prepayment will be paid over the number of remaining GST payment dates left in the year. So, for example, an application made in April 2009 will earn 1/3rd of 50% of the estimated WITB in July, October and January. Prepayments will be reconciled to the actual entitlement when a return is filed by adding the prepayment amount to taxes owing.

"The difference between perseverance and obstinacy is that one comes from a strong will, and the other from a strong won't." Henry Ward Beecher
 

Comments from DAC 2008 attendees:

"Tremendous conference. Good range of topics – including non-technical.”
Diana Moore, Toronto, ON

"Nice to interact with previous conference participants. Well done Evelyn."
Lori Campbell, Toronto, ON

"The overall atmosphere created by the location, the wonderful speakers and the diverse and eclectic participants – lead to great conference." Grant McPhail, Brandon, MB

"Next year's conference – I will be there." George Attridge, Vancouver, BC

Click here to view our photo gallery from DAC 2008

Evelyn Jacks’ Essential Tax Facts: 2009 Edition

Ace Your 2008 Tax Return. Then, Plan to Create and Preserve More Real Wealth.

What’s New in Tax? Plenty! Find out more about using new tax exempt investments in your portfolio, phased-in retirement options and plenty of newly increased tax deductions and credits to help you generate more cash flow every month, with this easy-to-read guide to tax savings from Evelyn Jacks, Canada’s most trusted, best-selling tax author.

Whether you are attempting to complete your own tax return, want to ask better questions of your tax practitioner or need a handy reference to recent tax changes in your role as a professional tax and financial advisor, this is the right tax guide for you.

In her trademark, easy to read and learn style, Evelyn Jacks shows you how to get more from the tax system and pay less tax. Whether you are filing as an individual or in a family unit, or reporting income from employment, investments or as a result of selling your assets, this book will help you take control of your after-tax wealth by reducing your tax burden now and for the future.

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Making the decision to continue your professional development with specialized training is a necessity in today's marketplace. Your clients must not only recognize you as an expert through your credentials and reputation, but you must also demonstrate competencies within a broad base of issues and an ever-changing financial environment.

Knowledge Bureau Certificate Courses are taken by self-study, anytime from anywhere. Learn in the comfort and convenience of your own home or office. Students may custom design their own program, depending on available study time. Individual courses qualify for CE accreditation. Students choosing our courses may claim the tuition fee tax credit and in cases where students study at least 12 hours per month with The Knowledge Bureau, a Textbook and Education Tax Credit is possible.

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REGISTER NOW AND SAVE $45 ON A SINGLE COURSE, PREFERRED CLIENTS SAVE $70!

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