Would You Voluntarily Contribute Extra to CPP?

Last week, Federal Finance Minister Joe Oliver announced in the House of Commons that the government is open to allowing Canadians to make additional voluntary contributions to their CPP in order in increase their CPP savings.

He emphasized that the government is not interested in increasing the required CPP contributions in a manner similar to the plan being implemented in Ontario. No details of the concept were released.

While most employers would prefer the concept of voluntary CPP contributions because the employer is not required to match the employee’s contribution, one has to wonder how advisable it is for an employee or proprietor to choose to contribute to CPP rather than to an RRSP or TFSA.

The biggest downside of this option is that upon death of a taxpayer with no spouse or dependants, CPP pays a single lump-sum death benefit of no more than $2,500, even if the taxpayer has contributed $100,000 or more to the plan over their working career.

Consider Judy and Lisa, two sisters who are both widowed. If Judy had contributed $10,000 to her RRSP and Lisa had instead voluntarily contributed $10,000 to CPP, Judy will get a tax deduction for her contribution in the year that the contributions are made.  Unless the rules change, Lisa will get a non-refundable tax credit for her contribution - which will likely reduce her taxes payable by less than Judy's deduction.

When Judy dies, her estate will receive the balance of her RRSP/RRIF at the time of death. If she had not yet dipped into those savings, this could be $15,000 or more. In addition, she will receive a CPP death benefit of $2,500.

Under current rules, Lisa’s estate will receive the same $2,500 death benefit and nothing from the additional voluntary contributions.

In addition to the RRSP, employees who have no employer-sponsored pension plan can use a TFSA to accumulate funds for retirement. Although no tax deduction is available for these contributions, the upside is that the earnings in the TFSA are tax-free rather than just tax sheltered.

The only upside to making voluntary CPP contributions is that the fund will be locked in and not available except through a pension starting no earlier than age 60. Taxpayers who contribute to their TFSA or RRSP have the option to access those funds at any time (albeit with a tax penalty for RRSP withdrawals).

Click here for a Free Trial of the CPP Income Estimator Calculator. This is a straight-forward calculator that helps to determine total taxes paid for individuals and/or couples based on different combinations of income sources. It is also a critical tool for every advisor who wants to show clients the benefits of an RRSP contribution, the effect of dividends on net income, how to pension income split, and how to structure income to avoid a clawback of Old Age Security or other income-tested government benefits like the Child Tax Benefit for families.