Personal Finance

Trudeau going after Personal Services Corps disguised as small businesses

  • Last Updated:
  • Oct 21st, 2018 9:53 pm
Deal Fanatic
Nov 24, 2013
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Kingston, ON
mr_raider wrote:
Nov 10th, 2017 7:25 am
The article essentially argues that the RRSP contribution room needs to be doubled to match the equivalent defined benefit plan, yet still you don't get the risk mitigation available to pension plan beneficiaries.
It's a weird article. So many articles about how CPP represents a poor RoI for the individual and how it would be better to let people invest on their own, at least instead of expanding CPP, but now we get an article claiming that (risk ownership aside) you can't accumulate enough in an RRSP at annual 18% max contributions to purchase an equivalent (indexed/surivorship) life annuity to a DB plan?

It sounds like their definition of "retirement grade" investments is stuck in an era where interest-bearing instruments had higher returns.

Just trying to napkin-math it, say $100K salary, $18K annual RRSP contribution, for 30 years, growing at 4% real return. That's a $1M portfolio after 30 years. $1M isn't enough to buy a $60,000 (2% x 30 years = 60%) annuity anymore? 4% real per annum is pretty conservative for a 30 year average return too.
Sr. Member
Jul 20, 2017
514 posts
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mr_raider wrote:
Nov 9th, 2017 9:03 pm
An interesting read on how juicy defined benefit plans are:

http://business.financialpost.com/perso ... -limit/amp
and don't forget that most DB plans also come with the medical and dental benefits for the retirement...all tax free obviously ( as it was widely published in the sears bankruptcy news)
interestingly, morneau and trudauu did not mention these facts in their opening salvo attack on the small businesses...
maybe is now time for them to launch a fairness attack on the public sector....wait, who will write the opening paper?
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Jan 15, 2017
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Sebastian6300 wrote:
Nov 10th, 2017 10:34 am
and don't forget that most DB plans also come with the medical and dental benefits for the retirement...all tax free obviously ( as it was widely published in the sears bankruptcy news)
interestingly, morneau and trudauu did not mention these facts in their opening salvo attack on the small businesses...
maybe is now time for them to launch a fairness attack on the public sector....wait, who will write the opening paper?
Since MPs have the same type of plan, they will never change the public service plan without first changing their own.
Sr. Member
Jul 20, 2017
514 posts
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taxrage wrote:
Nov 10th, 2017 10:45 am
Since MPs have the same type of plan, they will never change the public service plan without first changing their own.
And the way is structured is not even visible. This allows them to look better when compared with private sector, that is claiming that they make much less...
Sr. Member
Jul 20, 2017
514 posts
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Sebastian6300 wrote:
Nov 10th, 2017 11:11 am
And the way is structured is not even visible. This allows them to look better when compared with private sector, that is claiming that they make much less...
I just don't understand why the actual rrsp adjustment is not based on the actual amount paid into the pension fund by the employer...why do we need all this mumbo-jumbo adjustment factor that no longer has any relation to the new realities...
Deal Fanatic
Nov 24, 2013
5112 posts
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Kingston, ON
Sebastian6300 wrote:
Nov 10th, 2017 11:14 am
I just don't understand why the actual rrsp adjustment is not based on the actual amount paid into the pension fund by the employer...why do we need all this mumbo-jumbo adjustment factor that no longer has any relation to the new realities...
Putting just the employer pay-in would actually result in a lower pension adjustment, as the employee contributes too to most DB plans I know of. What the "rule of 9" does, 2% benefit accrued in a year of service times 9 = 18%, is take away almost all new RRSP contribution room for an individual on a DB plan. If you just looked at employer pension contributions, the PA would be too low. If you did employee plus employer contributions as the PA like a DC, it's ignoring that the contributions are going to funds that already have significant Assets Under Management, rather than ultimately belonging to the individual contributor. Actual contributions paid for, say, someone in HOOPP or OMERS with well-funded pensions can be under 18%, even after you factor in the employer portion. HOOPP for example looks like 16% for someone making $60,000:

https://hoopp.com/members/hoopp-pension ... alculation

Should Sally (from their example) get that extra 2% in RRSP room each year on top of accruing her well-funded, indexed, DB pension? The Rule of 9 Pension Adjustment is taking more RRSP room away from her than her+employer contributions, not less.
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Feb 26, 2008
1821 posts
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Mike15 wrote:
Nov 10th, 2017 10:09 am
It's a weird article. So many articles about how CPP represents a poor RoI for the individual and how it would be better to let people invest on their own, at least instead of expanding CPP, but now we get an article claiming that (risk ownership aside) you can't accumulate enough in an RRSP at annual 18% max contributions to purchase an equivalent (indexed/surivorship) life annuity to a DB plan?

It sounds like their definition of "retirement grade" investments is stuck in an era where interest-bearing instruments had higher returns.

Just trying to napkin-math it, say $100K salary, $18K annual RRSP contribution, for 30 years, growing at 4% real return. That's a $1M portfolio after 30 years. $1M isn't enough to buy a $60,000 (2% x 30 years = 60%) annuity anymore? 4% real per annum is pretty conservative for a 30 year average return too.


Yes, and we should not forget that DB plans tend to have cpp integrated, meaning that when you turn 65, your pension decreases by the value of your cpp cheque. So to compare apples to apples, you don't need a $60k annuity, but rather a $60k - $13k = $47k annuity. With your million bucks, safe withdrawal rate theory would suggest that you could likely withdraw pretty close to that $47k and there'd be a high likelihood that you'd also leave a big pile of money to your kids too when you finally kick off.

As I suggested up thread, for somebody who has the discipline to actually make rrsp deposits and who invests a bit of time to make intelligent asset allocation and investment fee decisions, an rrsp might even be better than a db plan.
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Feb 26, 2008
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mr_raider wrote:
Nov 10th, 2017 7:25 am
The article essentially argues that the RRSP contribution room needs to be doubled to match the equivalent defined benefit plan, yet still you don't get the risk mitigation available to pension plan beneficiaries.

Well, to be fair, the article was written by someone in the financial planning industry. It makes perfect sense that he'd advocate for expanded contribution limits and complain about DB plans because CIBC does not make any money administering db plans.

That being said, asset returns tended to be a shade higher back when the factor of 9 was implemented, so there's certainly a strong argument to examine whether a factor of 12 shouldn't be used now. That would reflect a long term investment yield of 8.5 per cent, and would result in bumping up contribution limits by about one-third. For the few of us who actually max-out our contributions, that would be helpful, but as the article said damned few Canadians come anywhere close to exhausting the existing rrsp and tfsa combined limits.
Sr. Member
Jul 20, 2017
514 posts
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Mike15 wrote:
Nov 10th, 2017 12:03 pm
Putting just the employer pay-in would actually result in a lower pension adjustment, as the employee contributes too to most DB plans I know of. What the "rule of 9" does, 2% benefit accrued in a year of service times 9 = 18%, is take away almost all new RRSP contribution room for an individual on a DB plan. If you just looked at employer pension contributions, the PA would be too low. If you did employee plus employer contributions as the PA like a DC, it's ignoring that the contributions are going to funds that already have significant Assets Under Management, rather than ultimately belonging to the individual contributor. Actual contributions paid for, say, someone in HOOPP or OMERS with well-funded pensions can be under 18%, even after you factor in the employer portion. HOOPP for example looks like 16% for someone making $60,000:

https://hoopp.com/members/hoopp-pension ... alculation

Should Sally (from their example) get that extra 2% in RRSP room each year on top of accruing her well-funded, indexed, DB pension? The Rule of 9 Pension Adjustment is taking more RRSP room away from her than her+employer contributions, not less.
thanks for the very detailed explanation...unfortunately the way I remembered from my past employment, it looked different.
I also noticed an odd thing, my wife has a DC with some matching...maybe you know how the different amounts are taxed and appear on the T4 and how they affect the RRSP room...I've seen some odd numbers there...I tried to read the CRA guide, but is hard to make sens of it...
1-company contribution
2-employee contribution
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Jan 15, 2017
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kneevase wrote:
Nov 10th, 2017 12:31 pm
Yes, and we should not forget that DB plans tend to have cpp integrated, meaning that when you turn 65, your pension decreases by the value of your cpp cheque.
Hmmm, that may happen, but they are actually completely independent. CPP has no information on your DB pension, and your DB pension has no information on your CPP.

What happens is that some (not all) DB pensions have a bridge component, which is approximately the same as the CPP benefit. At age 65, the bridge benefit ends. That's it. You might have been drawing CPP at 60, 65, or not even started. The DB pension doesn't know - or care. If there is a bridge component, it simply ends at 65.
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taxrage wrote:
Nov 10th, 2017 1:30 pm
Hmmm, that may happen, but they are actually completely independent. CPP has no information on your DB pension, and your DB pension has no information on your CPP.

What happens is that some (not all) DB pensions have a bridge component, which is approximately the same as the CPP benefit. At age 65, the bridge benefit ends. That's it. You might have been drawing CPP at 60, 65, or not even started. The DB pension doesn't know - or care. If there is a bridge component, it simply ends at 65.

Yeah, I get that. The upshot is that your effective annuity is lower than what some people think. When you turn 65 sometimes your bridge ends, which means that the "juicy" db plan is not nearly as lucrative as some people might believe. People need to ensure that they're comparing apples to apples when they claim that a db blows away a fully funded rrsp. Without a doubt, the DB is a great way to manage longevity risk, but people forget that the flip side of that is that they are atrocious if you have a lack of longevity (and in cases of a lack of longevity, the rrsp gives your kids a nice pile of money eye).
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Jan 15, 2017
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kneevase wrote:
Nov 10th, 2017 5:37 pm
Yeah, I get that. The upshot is that your effective annuity is lower than what some people think. When you turn 65 sometimes your bridge ends, which means that the "juicy" db plan is not nearly as lucrative as some people might believe. People need to ensure that they're comparing apples to apples when they claim that a db blows away a fully funded rrsp. Without a doubt, the DB is a great way to manage longevity risk, but people forget that the flip side of that is that they are atrocious if you have a lack of longevity (and in cases of a lack of longevity, the rrsp gives your kids a nice pile of money eye).
Yup, all true. Of course the bridge only applies (typically) to your YMPE, so if your best 5 is something like $200K, most of that benefit is paid for life. Of course, if you die 5 years in, that's usually it for the benefit, unless you have a spouse. A $2M RRSP sticks around, but is harder to accrue.
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Feb 26, 2008
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taxrage wrote:
Nov 10th, 2017 7:01 pm
Yup, all true. Of course the bridge only applies (typically) to your YMPE, so if your best 5 is something like $200K, most of that benefit is paid for life. Of course, if you die 5 years in, that's usually it for the benefit, unless you have a spouse. A $2M RRSP sticks around, but is harder to accrue.

Best 5 average of $200k? That's 4 times the ympe. There are probably a few people out there who earn that much money, but they would be a very small minority. The much larger group are the folks who earn $80k or $100k. Those folks might expect a pension of perhaps $48k or $60k, and cpp represents a healthy portion.
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May 7, 2017
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tdiddy23 wrote:
Nov 5th, 2017 1:03 pm
Not sure why it would have to be an absolute tax cut with less revenue? As in, they take your spouses income, and if together you are >200K for example, then you pay a portion in a higher bracket.

Not exactly my priority for tax changes in this country, I agree I'd rather see changes that encourage productivity such as limiting top tax bracket, but hypothetically there is room here for couples that are probably undertaxed.
Well a choice by definition leads to less revenue otherwise it isn't much of a choice is it. I completely agree with your second sentence and not only because it would benefit me personally. We also need to respond to US tax changes. If they cut corporate taxes we might need to at least match or we will lose almost as much revenue and lots of jobs.

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