In 2018, the NDP government in British Columbia unleashed a new wave of taxes aimed at business owners. Here’s how you can minimize the damage.
A New Payroll Tax for 2019
Starting January 2019, there will be a new “Health Tax” in British Columbia that applies to all employer-paid benefits. This is on top of the current payroll taxes like CPP, EI and WCB. This health tax will also apply to employer contributions that are made to Group Retirement Savings Plans.Here’s a strategy to help minimize the impact of these new taxes. This strategy has the added benefit of helping you retain employer contributions to the plan if an employee leaves the company.
A Boiling Frog
OK, you might have heard this one:
A few years ago scientists conducted an experiment involving frogs. They wanted to determine how a frog would react when dropped into a vat of boiling water. When they dropped a frog into the boiling water it blasted from that vat like a bat out of Hades! The scientists decided to take the experiment a step further. They took the frog, and held it over a different vat of water. Only this time the water was lukewarm. They dropped the frog and it just laid there, floating lazily on the water’s surface. The frog laid in the water contented, happy, and relaxed. But – What the frog didn’t know was that underneath the vat was a raging fire. It was slowly, but surely, heating the vat of water. The contented frog, oblivious to the changing temperature, boiled to death.That’s kind of what payroll taxes are like. They’re slowly added and increased on the sly, bit-by-bit over time, until one day you realize that your payroll is going to boil you alive!Here’s how you can help lower the temperature of that boiling water.
The Magic of a Deferred Profit Sharing Plan (The DPSP)
There is a type of group savings plan called a Deferred Profit Sharing Plan. I will refer to this as the DPSP for short.This type of plan is similar to a traditional Group Retirement Savings Plan, with some important and beneficial differences:1 – Contributions Don’t Attract TaxContributions into a DPSP are done by the employer but they are not subject to any payroll taxes, unlike contributions to tradition plans. This includes the new Health Tax which starts January 2019.2 – Employer Contributions Can Be Retained if Employee DepartsContributions into a DPSP can be kept in the plan for a set period of time before they are released to the employee. A standard lock-in period is 2 years. Another phrase for this is “vesting”. Once the contributions are passed the vesting period they become available for the employee. This helps reduce the costs of employee turnover because if the employee leaves before the vesting period is up, they can’t take the money with them.3 – You Don’t Have to Reinvent the WheelDPSPs are an add-on to your existing group retirement plan. You don’t need to change plan providers or payroll systems to make this happen. This means a DPSP can get up and running with minimal time and effort. Once the DPSP is set up, employer contributions are simply redirected to the DPSP instead of the group savings plan. The original group savings plan remains in place for employee contributions.
Next Steps …
Adding a DPSP to your total employee compensation package is kind of like adding a pressure release valve to your payroll costs and taxes. You simply install it and let it do the work when things get hot.At Canada’s Best Pension Plan, we’re always looking for new and unique ways to help employers and their employees succeed.Click here for a complimentary review of your plan to see if we can help you reduce costs and payroll taxes, and increase employee wellness.