CPP Legislation Is Introduced

A Notice of Ways and Means Motion to Amend the Income Tax Act was introduced to enact changes to the Canada Pension Plan on October 6, 2016. 

This paves the way to increased CPP premiums to be phased in over seven years, from 2019 to 2025, to prevent just over a million families in Canada from being at risk for not saving enough to generate 60% of their pre-retirement income when they retire.

Still, the CPP enhancement will not solve the retirement readiness issue. According to the background documentation released with the changes, the CPP changes will reduce the share of families at risk from about 24% to 18%, when considering income from the three pillars of the retirement income system and savings from other financial and non-financial assets—all of which are needed to replace 60% of pre-retirement income.

The new enhancements to the CPP will, in the future, increase the benefits from one-quarter to one-third of annual earnings up to a specified maximum.

Middle-class families without workplace pension plans—about 33% of families near to retirement age—are at most risk of under-saving for retirement. This compares to 17% per cent of families who have workplace pension plan assets.

As described in the documents released by Finance Canada, the CPP is a “career average plan,” which means a worker’s earnings over an entire career are considered when calculating CPP benefits. Under the proposed enhancements, persons making about $50,000 a year in today’s dollars over their working life can expect to receive about $16,000 per year in retirement income from the CPP instead of roughly $13,000 under today’s rules.

However, few people actually qualify for full benefits. The average CPP retirement benefit that was paid in December 2015 to new CPP beneficiaries aged 65 was $7,552 per year, or about 60 per cent of the maximum benefit. Under the new plans, full enhanced CPP benefits will be available after about 40 years of making contributions.  But, still, the full benefits will only be available to those who earn at least the maximum pensionable earnings throughout their working lives.

Partial benefits will be available sooner, based on years of contributions and income levels. A post-retirement benefit will also be paid to recipients of the CPP retirement benefit who continue to work and make contributions to the plan while receiving benefits.

The legislation also includes proportional enhancements to CPP disability and survivor benefits. Premiums will increase substantively over today’s maximum of $2554.30 for each employee and employer (Total $5,108.60 – the amount paid by self-employed taxpayers):

Notes: Contribution rate estimated by the Department of Finance Canada, and requires confirmation from the Office of the Chief Actuary and is subject to secondary design decisions.

The new rules will also include tax changes to allow the enhanced portion of the CPP to be deducted from income, similar to the RPP/RRSP rules; the existing portion will qualify for a non-refundable tax credit.

The Working Income Tax Benefit for low-income earners will also be enhanced. It is currently a refundable tax credit of 25 per cent of each dollar of working income in excess of $3,000 (in most provinces). For 2015 the maximum benefit was $1,844 for working income at a level of $10,375 for an eligible couple or family with children. The WITB is reduced at a rate of 15 per cent of each additional dollar of net income over $15,915, being fully phased out when net income reaches $28,209.

For single taxpayers, the WITB maximum was $1,015 when working income reached $7,060, with a phase-out beginning when net income reaches $11,525. The benefit disappears when income reaches $18,292. 2016 rates will depend on the indexation factor for 2016 which cannot be calculated until the September CPI rates are released later this month.

Under the proposed amendments, the WITB will be designed to provide additional benefits that roughly offset incremental CPP contributions for eligible low-income workers. It is expected that additional annual spending of $250 million will achieve this objective (based on the full implementation of the higher contribution rate on earnings below the YMPE).

For more information and to build proficiencies in providing professional retirement planning services, see the Tax-Efficient Retirement Income Planning Course or attend the Distinguished Advisor Workshops that will begin later this month in Vancouver (October 27), and run through early November in Winnipeg (November 1), Toronto (November 2) and Calgary (November 3).

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