Owner managers may want to consider revising their remuneration strategy given our current environment of low corporate rates, high personal taxes and new Canada Pension Plan (CPP) rules (the New Rules). Under the New Rules, an individual can collect CPP at age 60 even if he/she is still working. However, by electing to take CPP prior to age 65 the reduction from the amount that the individual would be entitled to receive at age 65 will be increased to 0.6% of the amount per month from 0.5% per month by 2016.
With low corporate tax rates owner managers who are 60 or over may want to meet their cash flow needs by taking dividends instead of a salary. By doing so contributions into the CPP (both employee and employer contributions) will not be required. Even with the loss of RRSP contribution room the saving in cash flow, plus the CPP income received from age 60 to 65 can put a significant amount of cash into the owner manager’s hands early, as opposed to waiting until age 65.
Our calculations, based on reasonable tax rates and rates of return show that in many cases the strategy's benefits continue until approximately age 85. This means that for approximately 25 years, the owner manager will have received and invested five years of early CPP payments and the company will save CPP contributions. If payroll taxes apply, the breakeven point will be even later.
Depending on the circumstances of the particular individual, electing to take CPP income prior to age of 65 can be advantageous to an owner manager who can take dividends instead of salary. In particular, there is an added incentive for those individuals turning age 60 before the year 2016, to do so, since their CPP benefits will only be reduced by a phased-in amount, compared to the planned 0.6% monthly reduction for individuals turning age 60 after the year 2016.
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