When new benefit plans are implemented we typically have several options on how to define earnings.

In situations where plans have a flat life amount and no long-term disability (LTD) benefits, the definition of earnings is of no consequence. In other cases, where the life amount is calculated as a multiple of earnings or where there are income-related LTD benefits, it can be very important.

It is vital that the advisor knows how staff are compensated to ensure that the plan meets these needs appropriately. Even more important is reporting the earnings accurately to the insurer. Failing to do so could result in benefits being paid out at a reduced level or, worse, in an employee not receiving the level of benefit they are entitled to.

Imagine a scenario where a sales representative has the following level of coverage:

• three times earnings for life insurance and AD&D;
• and a two thirds flat scale LTD benefit
• the employee is compensated by a $50,000 base salary and $50,000 in commissions annually

How do we define earnings? If it is on base salary only, the life benefit would pay out $50,000 and the monthly LTD benefit would be $2778. If earnings is defined using base salary plus commissions the life benefit would be $100,000 life benefit and the monthly LTD benefit would be $5556.

Either definition of earnings can be applied, as long as the employer and employee have the same understanding and the information is communicated clearly in benefit booklets and through employee meetings.

Problems will inevitably arise if the employee is under the misconception that their benefits are determined by base salary plus commission when in reality they are based solely on base salary.

Another potential issue is when the employer has structured the plan to include base salary and commissions but is only reporting the base salary information to the insurer.  In this situation, a employee who needs the LTD benefit would only receive half of what they are entitled to and the employer could be held accountable for the remainder.

This has the potential to result in a huge liability for the employer. If the employee was just like the example used above and became permanently disabled at 35 years old, the liability for the employer could amount to over a million dollars.

Commissions are not the only thing to consider when defining earnings. What about situations where there is ongoing, regular overtime or regular or annual bonuses?

It is imperative that the plan document clearly states the definition of earnings as the employer intends and that this information is thoroughly communicated to staff and reported to the insurer properly. Only by doing so can the employer avoid any potential liability or employee issues.

By Dave Patriarch, Mainstay Insurance Inc.

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From smallbizadvisor:

Shortly after the election was called the Canadian Federation of Independent Business (CFIB) asked the federal party leaders to provide their ideas on how they would help small businesses if elected.

…

As a strictly non-partisan organization, CFIB has highlighted elements of the platforms to help business owners make their own decisions:

Commitments for Small Business (in alphabetical order by party):

• Bloc – a tax credit for small firms hiring youth
• Conservative – an EI hiring tax credit for small firms
• Green – cutting payroll taxes by one-third
• Liberal – an EI hiring credit for youth and the amalgamation of programs for entrepreneurs
• NDP – a cut to the small business corporate tax rate to 9% and hiring credit

Ideas to Small Business the CFIB does not support (in alphabetical order by party):

• Bloc – an increase in CPP premiums
• Conservative – no plan on unfunded public sector pensions estimated at $200 billion
• Green – a hike in CPP maximum pensionable earnings
• Liberal – an increase in CPP payroll taxes and corporate tax hike
• NDP – a massive increase in payroll taxes and expansion of EI benefits

You can read the full article here. Find out more about the Canadian Federation of Independent Business on their website.

**REMINDER: Monday is Election Day**

Don’t forget to vote!

Photo Credit: “don’t be late” by haven’t the slightest on Flickr

Business owners tend to pay themselves enough each year to ensure they can maximize their RRSP contributions. Yet given the tax deferral opportunities available to small businesses, Jamie Golombek concludes that leaving funds in the company may make more sense than taking a salary.

If you’re an incorporated small business owner, chances are you’ve probably been advised at one time or another to pay yourself at least enough salary from your corporation to allow you to contribute the maximum amount to an RRSP. This is because the ability to contribute to an RRSP is dependent on receiving “earned income” in the prior year. Earned income includes salary and bonuses but does not include dividends. Subject to an annual cap, the annual RRSP contribution limit is calculated as 18 per cent of the prior year’s earned income. For example, in 2010, you would have to receive a salary of at least $124,722 to be able to contribute the maximum amount to an RRSP ($22,450) for 2011.

There are potentially two flaws with this reasoning, at least for Canadian-controlled private corporations (CCPC) with taxable income subject to the preferred corporate small business tax rate. First, if you need the cash, depending on your province of residence, you may actually pay more tax on the funds withdrawn as a salary than if the same funds were taxed to the corporation and then withdrawn as dividends. Second, if you don’t need the cash, you give up a significant tax deferral by withdrawing the funds as a salary to be taxed immediately rather than leaving the cash in the corporation to be taxed at a much lower small business corporate tax rate.

These two points are based on what is commonly known as the “theory of integration.”

You can read the rest of Jamie’s article here.