One of the most frequently asked questions when comparing lump sum versus installments is whether or not a lump sum is actually better than fixed payments. The fact is, it actually depends on a variety of factors. First, you have to examine how much money you’ll get when you retire. If you’re currently receiving a large sum of money each month, then you might be better off saving that money for retirement instead. However, if you’re making your payments monthly, then you might be best off by continuing to make your payments until you actually retire.
One of the biggest arguments made by lump sum versus payments for certain groups of individuals in Canada is the argument that they’re an inappropriate method of tax planning. Proponents of fixed rate savings claim that a fixed rate can easily be manipulated by large business owners into undercharging the actual taxable income of employees. In other words, these business owners might engage in accounting tricks that show their employees as receiving a higher salary than they actually are. By creating this false impression, they could actually be reducing their taxable income. Lump sum payment proponents counter that their lack of depreciation allows them to charge the full amount to the government, regardless of the actual taxable income.
In addition to these technical points, there is also an important ethical consideration when lump sum versus payments issues are raised. Some tax experts argue that because aboriginal groups are recognized as “indigenous peoples” by the Canadian government, there is no way that the government could charge tax on land that was taken from First Nations groups in the past. Other tax experts and Native rights groups opine that even if aboriginal groups are granted tax status as “aboriginal persons,” it doesn’t mean that their lands are automatically entitled to taxation. Instead, these groups assert that the bill 22 proposal violates the rights of aboriginal groups by bypassing traditional aboriginal law and making laws that apply to everyone else rather than specific groups.
Many tax experts have disputed the legality of a lump sum versus payments debate. Proponents of the bill assert that Canadian governments have been able to successfully fund their social programs for over 20 years without charging tax on individuals’ incomes. The only time this has been challenged is with respect to workers’ compensation plans, where there are some provisions that are interpreted to deny this type of tax relief. While some provinces have ruled that there is nothing in the law that specifically authorizes a lump sum payment in exchange for workers’ compensation, several provinces have made it clear that these types of agreements cannot be construed to have a discriminatory intent.
Another important issue is how a company would determine its employees’ retirement age. The Federal government has established a number of retirement age levels for the purposes of providing adequate retirement benefits to workers who are otherwise qualified to receive them. The CPP sets the retirement age at sixty-five years old, but the age used by the employer cannot be used to discriminate against employees. As well, the CPP does not allow companies to have a strict definition of retirement age, and as such the CPP is not an appropriate replacement for employer pension plans. The main difference between the lump sum versus payments or a pension is that both provide employees the ability to defer tax payments until they reach a specific age.
Critics of lump sum versus payments argue that employers will always have a choice of choosing between tax relief and having their employees pay into a pension plan. However, this argument does not hold water when a company chooses to make pension payments rather than pay into one. If a company chooses not to participate in a pension plan, employees can choose to defer taxes until they reach the age of sixty-five on their own. This allows them to invest the money saved into other investments and reduce the amount that they will need to repay the tax man when they reach retirement age. The government tax relief does not need to be paid, therefore allowing the employee to retain more of their income.