Tax Alert - Changes to deductions for Canada Pension Plan contributions
The rules for deducting Canada Pension Plan (CPP) contributions are changing effective January 1, 2012 and the changes impact employees, employers and self-employed individuals. In this article, we highlight the changes and the necessary actions to take.
What is changing?
Under the current system for CPP, if an individual receives a CPP pension and returns to work, there are no deductions made from earnings for CPP contributions. Under the new system, starting in 2012, there may be a requirement for employers to deduct CPP contributions from the pensionable earnings paid to an employee who is at least 60 years of age but under 70, even if the employee is receiving a CPP or Québec Pension Plan (QPP) retirement pension. When CPP contributions are made under these circumstances, individuals will increase their CPP retirement benefit payments through the newly created Post-Retirement Benefit (PRB), which may begin to be paid the year following the contribution and will continue to be paid for the individual’s lifetime. Each year that an individual contributes to the CPP while receiving a CPP or QPP pension will generate a new PRB, even if the individual is already receiving the maximum pension benefit. The amount of the PRB will depend on the earnings level of the contributor and their age. Service Canada provides more information about the PRB, including an estimate of benefit amounts, on their website at:
http://www.servicecanada.gc.ca/eng/isp/cpp/prb/index.shtml.
How do the new rules apply for employers and employees?
Under the new rules, an employee who works and receives a CPP or QPP retirement pension will now have to contribute to the CPP if he or she is at least 60 years of age but under 65. The employer will also need to pay the employer portion of CPP contributions. Note that employers are required to deduct these contributions even if the employee was not contributing in a previous year because he or she was receiving a CPP or QPP retirement pension.
For employees who are at least 65 years of age but under 70, and who work and receive a CPP or QPP retirement pension, the requirement for contributions is voluntary. Employees are able to opt out of contributing to the CPP by filing an election to stop paying CPP contributions. The election is made by providing a copy of a signed and completed form CPT30 to all of their employers and sending the original form to the Canada Revenue Agency (CRA). This form is available on the CRA’s website at http://www.cra-arc.gc.ca/E/pbg/tf/cpt30/README.html.
The election will take effect on the first day of the month following the month the employee provides their employer(s) with the form. Therefore, if in December 2011, an employee is at least 65 years of age and is receiving a CPP or QPP retirement pension and does not want to start contributing to the CPP in January 2012, they should complete and file form CPT30 as required as early as possible in December 2011. Employers will be required to remit CPP contributions (both the employee and employer portion) for this group of employees beginning in January 2012 if an election is not filed.
An employee who makes an election to stop paying CPP contributions also has the option to revoke that election. Note, however, that an election cannot be revoked in the same calendar year that the employee elected to stop contributing to the CPP. Therefore, where an employee makes an election to stop contributing to the CPP in 2012, they cannot revoke this election before 2013. Revoking an election is done by completing the appropriate information on form CPT30 and filing a copy with all employers and sending the original to the CRA. An employer will be required to deduct CPP contributions for eligible employees who have provided the form. The revocation would take effect on the first day of the month following the month that the employee provides the CPT30 to their employer(s).
Do the new rules apply to self-employed individuals?
Yes, similar rules apply for individuals who are self-employed, at least 60 years of age but under 70, and who receive a CPP or QPP retirement pension. For self-employed individuals who are at least 65 years of age but under 70 and eligible to opt out of contributing to the CPP, they can do so by completing the applicable section of Schedule 8, CPP Contributions on Self-Employment and Other Earnings for 2012 and filing it with their Income Tax and Benefit Return for 2012. The earliest month an election can take effect is the first month following the month of the individual’s 65th birthday. The election will stay in effect until the individual is 70 years of age or until they revoke the election. The CRA will release further information on how to revoke an election at a future date, as it cannot be revoked before 2013 in any event.
Note that individuals who are both employed and self-employed should use form CPT30 for elections and revocations.
Who is not impacted by the changes?
These changes do not affect the salary or wages of:
- An employee who is considered to be disabled under the CPP or QPP, or
- A person who has reached 70 years of age.
Therefore, employers are not required to deduct CPP contributions from the salary and wages that are paid to these employees. Note also that employees who are not subject to CPP (e.g. Québec employees) are not affected by these rules.
Summary of actions to take
Eligible employees who want to opt out of contributing to the CPP in 2012 will need to take action and file an election as required before the end of the year, and self-employed individuals will need to make the appropriate filings with their 2012 personal income tax return. From the employer’s perspective, payroll processes will need to change for 2012 to ensure deductions for CPP are made for this new group of employees as necessary, and to properly deal with related elections and revocations on a timely basis. For more information on the new requirements for CPP contributions, contact your BDO advisor.
