SIGNIFICANT CHANGES TO EMPLOYMENT INSURANCE AND THE CANADA PENSION PLAN
Significant changes are coming to the Employment Insurance (EI) and the Canada Pension Plan (CPP) systems. If you are self-employed and wish to collect EI or you’re approaching retirement and plan to collect CPP retirement benefits, this article will be of interest to you.
Changes to Employment Insurance
Chances are if you are self-employed, you have given some thought to the fact that you won’t have government assisted income protection for certain times in your life where you can’t work and won’t have a source of income. These times which can leave you financially strapped include welcoming a new addition to the family, being sick or injured, or caring for a gravely ill family member. Late last year the government passed some long awaited legislation that extends EI to cover special benefits, which are maternity, parental, sickness and compassionate care benefits, to you and others like you, on a voluntary basis.
If you are a self-employed Canadian citizen or permanent resident of Canada and you wish to take advantage of the EI special benefits, you are required to opt into the program at least one year prior to claiming benefits. As well, you will also be responsible for making premium payments for the tax year in which you apply to the program. Unlike the CPP, you will only have to pay the employee portion of the premiums.
Whether or not you opt into the program is something you should consider carefully, as once you’re in the program and collect benefits, you cannot opt out. In fact, you will have to contribute on self-employed earnings for as long as you are self-employed. For example, if you are planning on taking one parental leave and you feel that you have financially secured yourself against the other life altering events, then the decision to opt into the program may not be the right one for you. You should give serious thought to your personal circumstances and plans for the future when making this decision as you apparently can’t change your mind later once you receive benefits.
Having said that, provided that you have not claimed benefits, you can opt out of the EI program at the end of any tax year. Of course, this would be advisable only if you are certain that you won’t have a need for benefits in the future.
You should note that if you enter the program between January 31, 2010 and April 2, 2010, you will be able to make a claim for EI special benefits as early as January 2011. However, if you enter into the program after April 1, 2010, you will have to wait 12 months before you will be able to make a claim for the EI special benefits.
Self-employed residents of Québec will continue to receive maternity and parental benefits through the Québec Parental Insurance plan provided by the Government of Québec. In addition, they will now be eligible to take advantage of sickness and compassionate care benefits offered by the Government of Canada through the EI program (using contribution rates for Québec employees).
There are other specific details and conditions that will apply. If you are self-employed and want to enter the program to become eligible for the EI special benefits, contact your BDO advisor who can assist you in this regard.
Canada Pension Plan Changes
Along with the changes to the EI system, the government has enacted several changes to the CPP. It is important to note at the outset that these changes will not affect anyone who is currently collecting the CPP retirement, disability or survivor benefits, or anyone who starts to collect their pensions prior to 2011. Note that there are different enactment dates after 2010, and the impact of the changes will depend on when you apply for benefits. To date, representatives from the Régie des Rentes du Québec have not indicated whether the QPP will be harmonized with the recent CPP measures. We have summarized some of the significant changes to the CPP that may affect many of you in years to come.
Removal of Work Cessation Test
Under the current system, in order for you to qualify to collect the CPP retirement pension before you turn age 65 you must either reduce your earnings or stop work for at least two months. After this period, it is possible to work again. Under the new legislation, starting in 2012, this work cessation test will be removed. What this means is that you can start taking your benefit as early as age 60, without any work interruption. If you are planning to take your CPP benefit while continuing to work, either on a full or part-time basis, you will benefit from this change. This may allow you to use your CPP pension to phase into retirement or supplement your earnings while you continue to work.
Increase in the General Low Earnings Drop Out
The CPP retirement pension amount is based on the number of years an individual has worked and contributed to CPP, as well as the salary or wages he or she has earned. In determining the average of earnings over the span of a career, adjustments are made to account for years where an individual’s earnings are low or even non-existent. Currently, this provision called the “general low earnings drop out rate” allows for 15% of the years where earnings are low or nil to be dropped from the calculation. This means that if you started your CPP at age 65, then almost seven years of low or zero earnings are removed from the determination of your average earnings.
Under the new legislation, the general low earnings drop out rate is increased to:
- 16% in 2012, allowing a maximum drop out of almost 7.5 years; and
- 17% in 2014, allowing a maximum drop out rate of 8 years.
This is welcome news to individuals that have had several work interruptions.
Pension Coverage for Working Beneficiaries
Under the current system, if you receive a CPP pension and return to work, you will not pay contributions and as a result, you will not continue to build your CPP pension. Under the new system, if you are under age 65 and work while you receive a CPP retirement benefit, you and your employer will be required to make CPP contributions (which will effectively increase your CPP retirement benefit). This rule would be voluntary if you are age 65 and older, but employers of seniors opting to participate in the CPP would be required to also contribute.
Pension Adjustment Changes for Early and Late Take-Up
Under the current system you are permitted to take-up the retirement benefit of the CPP as early as age 60 or alternatively delay the take-up until after you are age 65. To ensure fairness, regardless of the age that the retirement benefit is taken-up, actuarial adjustments are made to the basic amount that would be provided at age 65. These adjustments which are made for pensions taken-up before age 65 and after age 65 will be changed under the new legislation as follows:
- The early pension reduction would be gradually increased to 0.6%, from 0.5%, per month for each month that the pension is taken before age 65. This would be done over a period of five years, starting in 2012.
- The late payment augmentation would be gradually increased to 0.7% from 0.5% per month for each month that the pension is taken after age 65 up to age 70. This would be done over a period of three years starting in 2011.
Consistent with these changes and the determination that 0.5% no longer ensures actuarial fairness, it was determined that regular reporting on the actuarial fair level of the pension adjustment should occur every nine years. Whether you take-up your pension early or late, these new measures will help ensure that amounts that are received are equitable.
Although the impact of these changes will vary based on your personal circumstances, the changes to EI and the CPP are a step in the right direction and demonstrate the government’s willingness to improve your economic security whether you’re facing retirement or any other life altering events. If you have any questions about how to apply for the new EI special benefits or the new CPP rules, contact your BDO advisor.
Next section: THE CRA’S NEW ADMINISTRATIVE POLICY ON EMPLOYER PROVIDED TUITION FEES, SCHOLARSHIPS AND BURSARIES
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