Federal budgets are long, technical documents that are torture to read. But if you manage HR and payroll for a living, you don’t have the luxury of ignoring them. That’s because lurking somewhere in those hundreds of pages may be potentially significant changes that directly affect how you do your job. This year’s version of the budget, which was tabled on March 29, 2012, is no exception. As usual, the changes affecting payroll are set out in the summary of tax changes in Annex 4 of the budget documents. Here are the14 changes in the 2012 federal budget that HR and payroll managers need to know about.
1. EI Premium Rates Set thru 2016 and Beyond
Two years ago, the government froze basic EI premiums at low rates to stimulate job creation. The resulting deficit in the EI Operating Account forced the government to allow a 5¢ per year increase in 2011 and 2012. The 2012 budget proposes to hold annual premium increases to 5¢ until the $9 billion deficit in the Operating Account is eliminated. Once the Account is back in balance, premiums will be managed around an estimated 7-year break-even rate, with annual premium increases capped at 5¢. Proposed premiums thru 2016:
Under current rules, the Canada Employment Insurance Financing Board (CEIFB) must set EI premium rates by Nov. 14 of the current year. The budget would require the CEIFB to set rates earlier in the autumn to give employers and employees more advance notification.
Conspicuous by its absence from the 2012 budget is the issue of the employer multiple, i.e., the fact that employer premiums are 1.4 times higher than employee rates, meaning that employers are paying 60% of EI program costs. Making the multiple even more of a bone of contention for employers is that the federal government continues to use EI to fund non-insurance programs. Unfortunately, the budget doesn’t say anything about these concerns.
2. 50% Cut in EI Working-While-on-Claim “Clawback” Rate
The current EI Working While on Claim program allows the unemployed to accept new work without giving up their EI benefits—but only to a point. Once they earn a certain amount, their EI benefits get cut dollar for dollar. The government claims this discourages people from working and has proposed a 2-year pilot that would cut the so called “clawback” rate from 100% to 50% of earnings and apply it to all earnings made while on claim.
Example: A laid off dental hygienist getting $450 per week in EI benefits finds part-time work paying $600 per week:
3. Extension & Regionalization of EI Best 14 Weeks Program
The budget also proposes to renew the EI Best 14 Weeks pilot program, which was due to expire in June 2012, until April 2013. Under the program, unemployed workers in regions with high unemployment rates receive benefits based on their highest 14 weeks of earnings in the year before the claim. Employers in the 25 regions in Canada where the program is currently in effect (mostly in the Maritimes and Québec) must provide 53 weeks of pay period information on the affected employee’s ROE.
This is the second year in a row that Best 14 Weeks has been extended. And it’s the last such extension. Starting April 2013, EI benefit amounts of all claimants will be based on the highest 14 to 22 weeks of earnings over the preceding year, depending on unemployment rates in their particular EI region. The idea of pegging weeks to local employment conditions is to keep EI in line with the local labour market and ensure roughly equivalent treatment of all similarly situated unemployed workers in those regions.
The government also plans to spend $21 million to help the unemployed find work more quickly, including linking EI with the Temporary Foreign Worker Program to make qualified Canadians aware of job opportunities across the country.
4. Changes to Old Age Security/Guaranteed Income Supplement Seniors Benefits
The good news is that Canadians are living longer; the bad news is that longer life expectancy makes it more expensive to provide seniors income benefits. The 2012 budget proposes changes to OAS/GIS to address this long term problem:
Higher Age of Eligibility: The budget proposes to raise the OAS/GIS eligibility age from 65 to 67 gradually, starting April 1, 2023, until fully implemented in January 2029. The measure won’t affect anyone born on or before March 31, 1958. (Note that OAS/GIS eligibility has no impact on an individual’s age of eligibility for CPP or QPP.)
Option to Defer OAS Pension: Starting July 1, 2013, seniors will be allowed to defer their OAS pensions for up to 5 years in exchange for a higher, adjusted pension starting in a subsequent year. Thus, for example, a senior turning 65 in 2013 who defers OAS until age 70 would get $8,814 rather than $6,481, starting in 2018. Adjustments will be actuarially-neutral the way they are under CPP. GIS benefits, which provide additional support for low-income seniors, will not be provided on an actuarially adjusted basis.
Easier Enrollment: Administratively, the government plans to establish a system to enroll seniors in the system proactively, i.e., without their having to apply. The new enrollment system will be phased in from 2013 to 2016.
5. Phasing Out of Overseas Employment Tax Credit (OETC)
The budget proposes to eliminate the OETC, i.e., the tax credit for employees who are Canadian residents. Phase out of the OETC, which is currently equal to federal tax otherwise payable on 80% of the qualifying foreign employment income up to $100,000 in maximum foreign income, would take place over 4 years:
|YEAR||QUALIFIED FOREIGN INCOME RATE|
|2016 and thereafter||0%|
6. Changes to Group Sickness or Accident Insurance Plan Tax Rules
Under current tax rules, employer contributions to employee group insurance plans are included in the employee’s income in the year when the benefits are received unless:
The budget proposes to include employer contributions to group sickness or accident insurance plans in employee income in the year contributions are made—to the extent such contributions aren’t in respect of a wage loss replacement benefit payable on a periodic basis—starting with contributions made on or after March 29, 2012 for coverage to the extent contributions relate to coverage for 2012; contributions made on or after that date for 2013 coverage get included in the employee’s 2013 income. (Note: The measure doesn’t apply to private health plans and other plans covered by Sec. 6(1)(a) of the Income Tax Act.)
7. Mandatory Employer Financing of Long-Term Disability Plans
The government wants to create a new law that would require federally regulated employers in the private sector to insure long-term disability plans they offer to their employees. The goal is to ensure keep receiving their LTD benefits even if the employer goes bankrupt.
8. Changes to Registered Disability Savings Plans (RDSPs)
Proposed changes to RDSP rules include:
9. Tighter Restrictions on RCA Investments
The budget proposes changes to close what the CRA sees as loopholes that enable RCAs (Retirement Compensation Arrangements), i.e., employer-sponsored, funded arrangements that help employees save for retirement, gain unwarranted tax advantages. The changes affect:
Penalty on Prohibited Investments: RCAs that have “specified beneficiaries,” i.e., employees entitled to RCA benefits who have a significant interest in the employer, would be subject to a 50% tax on prohibited investments. Custodians of RCAs would also be jointly and severally liable with the plan for the tax.
Broader Definition of “Advantages” Subject to Tax Penalties: Under current rules, RCAs must pay a special tax equal to the fair market value of “advantages” in transactions motivated to gain certain questionable tax benefits. The budget proposes to create several different definitions of “advantages” based on the kind of tax planning involved, effective for transactions on or after March 29, 2012. This will make the “advantages” restriction easier for CRA to apply.
Limits on RCA Refunds: A new rule would require that, effective March 29, 2012, where RCA property declines in value, the RCA tax would be refunded only if the decline in value of the property isn’t reasonably attributable to prohibited investments or advantages, unless CRA decides it would be just and equitable to refund the tax.
10. New Limits to Employee Profit Sharing Plan (EPSP) Contributions
Under current rules, employers’ tax-deductible contributions to an EPSP trust are allocated to the beneficiaries in the plan which are then included in the beneficiary’s income in the year of allocation. The allocation payments made by the trust are generally not subject to tax when the beneficiaries receive them.
To prevent business owners from directing profits to members of their families to defer tax on profits, the new budget proposes a new special tax payable by “specified employees,” i.e., one with a significant equity interest in or who doesn’t deal with the employer on an arm’s length basis. The tax is based on the “excess EPSP amount,” i.e., the portion of the employer’s EPSP contribution above 20% of the specified employee’s salary for the year, and has 2 components:
There would also be a new deduction to ensure that the excess EPSP amount isn’t subject to regular income tax in addition to the special rate. Specified employees wouldn’t be able to claim any other deductions or credits in connection with the excess EPSP amount.
The EPSP rules would take effect for employer contributions made on or after March 29, 2012 (other than contributions made before 2013 under a legally binding contract in existence before March 29, 2012). CRA will also be able to waive the special penalty in the interest of fairness.
11. Medical Expense Tax Coverage (METC) of Blood Monitors
The budget would add blood coagulation monitors used by individuals needing anti-coagulation therapy to the list of expenses eligible for the METC, starting with expenses incurred after 2011. Monitors would have to be prescribed by a medical practitioner to be eligible for the METC.
12. Extension of Small Business Hiring Credit
The budget would extend for one more year the temporary Hiring Credit for Small Businesses that hire new employees. The one-time credit of up to $1,000 would apply against the increase in the employer’s 2012 EI premiums over what the employer paid in 2011 and be limited to businesses with total 2011 EI premiums of no more than $10,000.
13. Graduated Penalties for Late Filings
The budget proposes reduced CRA penalties for late filings where:
14. CRA to Respond in Writing to Business Enquiries
Effective April 16, 2012, business can submit business enquiries to the CRA via the agency’s My Business Account portal. CRA will respond to these questions in writing. It’s unclear whether responses to those enquiries will be officially binding on the CRA.
As in previous years, the budget proposal is just the beginning of a year-long process. Other important payroll changes will occur before 2012 ends. Two of the important initiatives the government is working on that payroll folks need to keep their eye on:
Last but not least, no budget analysis is complete without a discussion of what’s not being changed. Key things the 2012 budget doesn’t propose to change include:
|Tax Rate||Income Threshold|
|15%||0 to $42,707|
|22%||$42,707 to $85,414|
|26%||$$85,414 to $132,406|
|29%||Greater than $132,406|
|Pension Income Amount||$2,000|
|Spouse/Common Law Partner||$10,822|
|Eligible Dependant Amount||$10,822|
|Child Under 18 (per child)||$2,1|
|Canada Employment Amount||0.15 x A; or 0.15 x $1,095, whichever is less (where A = annual gross income from office or employment before deductions)|
|Infirm Dependant (per)||$4,223|
Of course, all of these amounts will be subject to indexing.