The Canada Pension Plan enhancement – Businesses, individuals and self-employed: what it means for you

From: Canada Revenue Agency

Backgrounder

Starting January 1, 2019, Canadians will contribute more to the Canada Pension Plan (CPP). This change, known as the CPP enhancement, is designed to help increase retirement income for working Canadians and their families.

The CPP is a mandatory pension plan financed by contributions from employees, employers and self-employed individuals. It covers virtually all workers in Canada except Quebec, which administers its own plan called the Quebec Pension Plan (QPP). The CPP replaces a basic level of earnings for contributors upon retirement, disability or death.

Once mature, the CPP enhancement will increase the maximum CPP retirement pension by about 50%. It will also increase the survivor and disability pensions.

Enhancing the CPP will significantly reduce the number of Canadian families at risk of not saving enough for retirement, particularly those who do not have a workplace pension plan.

How will the CPP enhancement affect you?

• Your benefits will gradually increase as you contribute more to the CPP. Starting in 2019, annual CPP contribution rates will rise modestly over seven years. For example, if you earn $54,900 per year, you will contribute about $6 more per month in 2019. By 2023, you will be contributing about $40 more per month.
• How much your CPP benefits increase will depend on how much and for how long you contributed to the enhancement. Canadians just entering the workforce will see the largest increase in CPP benefits. Employees who are near the end of their working life will see a small increase.
• The CPP enhancement will affect you only if you work and contribute in 2019 or later. If you are retired, not working, and not making contributions to the CPP, nothing will change and your CPP benefits will not increase.
• The CPP enhancement will happen in two phases over seven years. Phase 1 takes place from 2019 to 2023 and involves a gradual increase in the contribution rate. Phase 2 will begin in 2024 and will only affect those at higher income levels.

How do Canadians save for retirement and how does the CPP fit into the picture?

Canada's retirement income system provides a balanced mix of public pensions and voluntary savings opportunities to help Canadians save for retirement. It is based on three pillars:

1. The Old Age Security program provides a basic level of retirement income to Canadian residents. It also offers additional support for low-income seniors through the Guaranteed Income Supplement. It is funded by government revenues.
2. The CPP and the QPP provide basic income replacement for contributors and their families when the contributor retires or dies or if they become disabled. Those plans are financed by contributions from employees, employers and self-employed individuals as well as the investment income from these contributions.
3. Voluntary tax-assisted private savings and employer-sponsored pension plans, such as registered pension plans, pooled registered pension plans, registered retirement savings plans and tax-free savings accounts. Individuals and their employers may contribute to these savings vehicles.

Canadians may also draw upon other assets for their retirement income.

Who participates in the CPP?

With very few exceptions, every person over the age of 18 who works in Canada outside of Quebec and earns more than $3,500 per year must contribute to the CPP. If you earn less than $3,500, you do not pay CPP contributions.

How do you make contributions?

Your employer deducts your share of CPP contribution from your paycheque each pay period and they contribute an equal amount.

If you are self-employed, you contribute the full amount when you file your T1 income tax and benefit return using Schedule 8, CPP Contributions on Self-Employment and Other Earnings. Your contributions are based on your net business income (after expenses). You do not contribute on any other type of income, such as investment earnings.

If, during a year, you contributed too much or earned less than the set minimum amount, your contributions will be refunded when you file your tax return.

How much do you contribute?

You make contributions only on your annual earnings (your net income if you are self-employed) between a minimum and a maximum amount.

The government sets the maximum amount each January, based on increases in the average wage in Canada. This maximum amount is referred to as the Year's Maximum Pensionable Earnings (YMPE).

The YMPE is announced every November. To keep things simple, we will refer to the YMPE as the earnings ceiling throughout the rest of this page.

What do you need to do?

Employees

• You don't need to do anything until tax time.
• When you do your taxes, your CPP contributions must be separated into two parts: base CPP contributions and enhanced CPP contributions. Base contributions are calculated at a rate of 4.95%, the same as your rate in 2018. Any amount above that is your enhanced contributions.
• Your T4 slip will not change. Your total CPP contributions deducted, both base and enhanced, will be reported in box 16 as a combined amount. There will be no distinction between the enhancement and the base CPP on your T4. Your total pensionable earnings will be reported in box 26 as before.
• Currently, you can claim a 15% non-refundable tax credit for your base CPP contributions. You will continue to do this after the enhancement. You will also claim a tax deduction for the enhanced portion.
• Electronic filers – If you file your return electronically using commercial tax software that is certified for NETFILE, or if a tax preparer completes and files your return using EFILE, the tax software will do all the necessary calculations. It will automatically separate and apply the base and enhanced contributions for you.
• Paper filers – If you file a paper income tax and benefit return, the CRA forms will guide you through a calculation of the base and enhanced CPP contributions, so you can claim the non-refundable tax credit and the tax deduction properly. Schedule 8 will break down your base and enhanced amounts. A new line (Line 223) will be added to your T1 return where you will enter the enhanced amount of your contributions from Schedule 8. The CPP base amount will be entered on line 308, as in the past.

Employers

• Withhold, remit and report CPP enhancement contributions in the same way you do for the base CPP.
• There are no changes to the T4 slip for reporting at the end of the year. Enter the base and enhanced CPP contributions as one amount in box 16 on each employee's T4.
• The CRA will provide you with payroll deduction tables and formulas, updated to present the base CPP and the enhancement as one combined deduction for each pay period.
• Amended T4127 payroll deduction formulas, taking effect January 1, 2019, will be available November 15, 2018. Amended T4032 and T4008 payroll deduction tables and supplementary tables will be available December 15, 2018. See Payroll Deductions Online Calculator (PDOC), payroll tables, TD1s, and more.
• Your employer contributions to the enhanced portion of the CPP and the base portion of CPP will both be tax deductible.

Self-employed

• Send your CPP contributions to when you file your T1 income tax and benefit return.
• Your contributions are based on net business income.
• When you do your taxes, separate your CPP contributions into two parts: CPP base contributions and CPP enhanced contributions. The base contribution is the amount that is calculated at a rate of 9.9% (which you currently contribute in 2018), and the enhanced portion is any amount above that. Currently, you can claim a 15% non-refundable tax credit on 4.95% of the base CPP contributions and claim a tax deduction on the other 4.95%. You will continue to do this after the enhancement. You will also claim a tax deduction on the enhanced portion of your contributions.
• Electronic filers – If you file your return electronically using commercial tax software that is certified for NETFILE, or a tax preparer completes and files your return using EFILE, the tax software will perform all of the necessary calculations. It will automatically separate and apply the base and enhanced contributions for you.
• Paper filers – Schedule 8, CPP Contributions on Self-Employment and Other Earnings, will break down your base and enhanced amounts. A new line (Line 223) will be added to your T1 return where you will enter the enhanced amount of your contributions from Schedule 8. The CPP base amount will be entered on line 308, as in the past.
• The CRA's payroll deduction tables and formulas will be updated to present the base CPP and the enhancement as one combined deduction for each pay period.
• Amended T4127 payroll deduction formulas, taking effect January 1, 2019, will be available on November 15, 2018. Amended T4032 and T4008 payroll deduction tables and supplementary tables will be available December 15, 2018. See Payroll Deductions Online Calculator (PDOC), payroll tables, TD1s, and more.

What is the difference between a non-refundable tax credit and a tax deduction?

• A non-refundable tax credit, on the other hand, reduces your tax payable for the year. Non-refundable tax credits, like those provided for contributions to the base CPP, are calculated by multiplying the total of the amounts and individual claims by the lowest federal tax rate, which is 15% in 2018.
• A 15% tax credit for the base part of the CPP reduces any taxes payable.

Tax Deduction

• A tax deduction reduces the amount of income that is subject to income tax.
• If your income for the year was $30,000, and you have a $1,000 tax deduction your taxable income is reduced to $29,000.
• The impact on your taxes is dependent on what tax bracket your income is in once the tax deduction has been applied.
• For example, a $1,000 tax deduction in a 30% tax bracket means that you will pay $300 less in taxes

Tax Credit

• Tax credits reduce income tax!
• Non-refundable tax credits are calculated by multiplying the tax credit by the lowest federal tax rate, of 15% in 2018.
• For example, if you claim a $1,000 non-refundable tax credit at a rate of %15, this will reduce your tax payable for the year by $150.
• What if the credit is more than what you owe? A non-refundable tax credit reduces your taxes owing, but you won't receive a refund of any amount over that.

Examples – CPP contributions before the CPP enhancement

Let's look at the contributions of Ayesha, Damien and Lena, who are employees at ABC Company, earning different salaries. Pierre is a self-employed consultant.

CPP Annual Contributions for 2018

Ayesha has an income over the earnings ceiling of $55,900 so her total contribution to the CPP is the maximum of $2,594. Ayesha's contributions are 4.95% of her CPP maximum contributory earnings. Her employer contributes the same amount at $2,594. No matter how much more money she makes, she cannot contribute more than the CPP maximum for 2018, even if she wished to do so.

Pierre has a self-employment net income over the earnings ceiling of $55,900 so, like Ayesha, he must contribute the maximum amount. However, since he is self-employed, Pierre must contribute at 9.9% rather than just 4.95%. In essence, Pierre contributes double what Ayesha contributes. Pierre's CPP contributions for 2018 are $5,188. He cannot contribute more than the maximum, even if he wishes to.

Damien is below the earnings ceiling, so he will contribute less than Pierre and Ayesha at $2,054, matched by his employer.

Lena's income is below the minimum earnings amount, so she is exempt from CPP contributions and contributes nothing.