Starting in 2019, the Canada Pension Plan (CPP) enhancements announced in 2016 will be gradually phased in over six years. The goal of the upcoming CPP enhancement is to address the risk of retirement income shortage for many Canadians by increasing the maximum annual pension benefit from approximately 25% of pre-retirement eligible income to 33%. In order to fund this benefit increase, there will be a two-step rise in contributions. First, the employee and employer contribution rates on earnings up to the yearly maximum pensionable earnings (YMPE) will each increase by 1% of YMPE by 2023. Second, a new “Upper Limit” on pensionable earnings was introduced, and beginning in 2024, a separate additional contribution of 4% of the difference between the Upper Limit and the YMPE will be required. This Upper Limit will be 7% higher than the 2024 YMPE amount, and 14% higher in 2025 and subsequent years. For example, by 2025, the YMPE is projected to be about $72,500. Therefore, the Upper Limit will be $82,700, or 114% of the YMPE amount. The difference between the YMPE and the Upper Limit (i.e. the incremental increase in maximum earnings) will be subject to a separate contribution rate of 4% each for employees and employers, and 8% for self-employed persons.
For 2019, the CPP contribution rate for employees and employers will increase by 0.15% — from 4.95% to 5.1%. This increase will be 0.3% for self-employed individuals, bringing the CPP contribution rate from 9.9% to 10.2% in 2019. If the YMPE were to remain the same in 2019 as it is now in 2018, this increased contribution would be $2,672.40 (compared to 2018 contribution rate of $2,593.80), or an increase of $78.60, for those employees earning the 2018 maximum YMPE of $55,900.
Employees should note that the additional contributions subject to the new 4% tax will be allowed as a tax deduction, which will minimize the after-tax cost of the increased contributions. For employers, while the additional employer contributions will be tax deductible in the same manner as current CPP contributions, employers will need to determine how to fund the added cost. In addition, if the payroll function is performed in-house, a review of internal systems may be beneficial in order to determine the updates that will be needed to effect the changes.
CPP enhancements are coming and will impact employees, employers, and the self-employed. If you have questions regarding the changes, please contact your BDO advisor.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of November 14, 2018.