Still Confused About CPP? Understanding Key Changes

Understanding CPP changes is something Canadians continue to struggle with. Here is some history, and key guidelines to share with your clients and guide you in leading them towards tax-efficient income planning decisions in 2018 and beyond.

On March 2, 2017, the Governor General signed an Order in Council to bring the Canada Pension Plan enhancement in Bill C-26 into force in Canada, offering increased benefits to the $37.3 billion in benefits to 5.2 million Canadians.

When and why were changes made to the Canada Pension Plan? Federal and provincial governments reached a historic agreement on June 20, 2016, in order to strengthen the plan and to meaningfully reduce the risk to Canadians who fail to save enough for retirement. Bill C-26 received Royal Assent on December 15, 2016, and had the formal support from all signatory nine provinces. The changes provide more money to Canadians when they retire.

Maximum benefit amounts. Currently the maximum benefit is $13,610.00, which is about one-quarter of the CPP maximum annual insurable earnings, and the enhancement increases those maximums in today’s dollar terms by about $5,000.00, to a maximum benefit of about $18,600.00. This is approximately one-third of annual earnings. An individual earning employment income of $48,000 per year in today’s dollars would receive about $16,000 per year in retirement when the enhancement is applied, instead of only $12,000.

This increases the maximum CPP retirement benefit by about 33 percent, and increased CPP contributions will be phased in over a seven-year period, beginning in 2019, to make the increased benefits possible. Currently contributions are 4.95 percent of earnings over $3,500 and up to the Yearly Maximum Pensionable Earnings (YMPE), which are $55,900 in 2018. This is projected to increase by 1 percent, to 5.95 percent, by 2023.

This is the employee percentage, and since employers must match the contribution, the total CPP contributions will be 11.9 percent when the changes are fully implemented. This is the rate that proprietors will pay when they file their annual income tax returns, based on their net income from self-employment. Currently that rate is 9.9 percent on earnings over $3,500.00. To help offset the cost of the enhanced CPP contributions for low-income earners, the Canada Workers Benefit (previously called the Working Income Tax Benefit) has also been enhanced.

One of the things that previously limited benefits for workers earning in excess of the yearly maximum insurable earnings ($55,900) during their working years, was the inability to make contributions to the plan after their earnings reached this maximum. Contributions must stop under the current plan, and the pension amount received is based on the YMPE rather than the amount actually earned during working years.

Beginning in 2024, the enhancements include an increased upper limit, projected to be $82,700.00. Earnings that fall between the YMPE and the upper limit will be subject to a rate of 4 percent and employers will be required to make matching contributions. This is an increase of 14 percent to the maximum income range covered by the plan, so those who earn more will receive more in retirement.

Individuals who earned $95,000 in 2018 face premiums of $2,593.80. If the enhancements were in place today, contributions to the CPP plan would look something like this, and these numbers should guide future financial planning decisions:

Margaret Hodgson is a DFA – Tax Services Specialist, who acts as a business services specialist and educational consultant through her accounting business M D Hodgson. Walter Harder, DFA-Tax Services Specialist is a Master Instructor, researcher, author and producer of Knowledge Bureau Calculators, including the CPP Income Estimator.

Additional educational resources: Expand your circle of knowledge by pursuing a Knowledge Bureau Designation today. Also recommended for a retirement planning specialty is the MFA – Retirement and Estate Services Specialist program, or the Tax-Efficient Retirement Income Planning certificate course.

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