( Disponible en anglais seulement )
Are you ready for the upcoming changes to the Canada Pension Plan?
In 2016, the Canadian federal and provincial governments (with the exception of Quebec) agreed to amend the Canada Pension Plan (“CPP”). The changes to CPP will soon come into effect. In this post, we discuss these changes and the steps that Canadian employers should take to prepare for them.
Effective January 1, 2019, contributions and benefits under CPP will be increased. With the changes, income replacement under CPP will be increased from 1/4 to 1/3 of pensionable earnings, to a defined maximum. Currently, a Canadian who makes $50,000 per year in today’s dollars over his or her working life receives approximately $12,000 per year in CPP benefits. With the enhancements, that number is expected to rise to approximately $16,000. As part of the change, the maximum amount of income subject to CPP will be increased by 14% to a projected amount of $82,700 in 2025.
In order to fund the enhancements, contributions to CPP will increase. The increase will begin on January 1, 2019 and be phased in over seven years in two phases. In phase 1, which will extend over five years, a higher contribution rate on earnings below the Year’s Maximum Pensionable Earnings (“YMPE”) (currently $55,900) will be applied. It is estimated that under phase 1, the contribution rate in 2023 for both employers and employees will be 1% higher on earnings below the YMPE. In phase 2, beginning in 2024, a separate contribution rate, expected to be 4% for employers and employees, will be implemented and phased in over two years. This contribution rate will apply only to earnings above the YMPE and is subject to the upper earnings limit. It is important to note that because these additional contributions are intended to fund the CPP enhancements, the contribution rates could change if an actuarial review shows that the additional contributions are not sufficient to fund the enhancements.
In order to ensure that the tax treatment of the additional contributions is neutral for those employees who choose to contribute less to an RRSP or registered pension plan because of the additional, required CPP contributions, employees will be entitled to a tax deduction instead of a tax credit for the additional CPP contributions. The tax treatment of the base employee contributions, which are the contributions currently being made under CPP, will not change. Employees will continue to receive a tax credit for the base contributions they make to CPP. In addition, all employer CPP contributions will continue to be deductible by the employer. Finally, as part of the changes, the federal Working Income Tax Benefit will be enhanced to offset the impact of the increased CPP contributions.
It is important for employers, sooner rather than later, to start thinking about whether any changes need to be made to payroll costs in order to address the costs of an expanded CPP and whether amendments to pension and benefits plans will be required to accommodate the more generous CPP benefit. In the event that employers determine that changes are needed, notice may have to be given to employees of any changes, particularly if those changes are significant. If any of the impacted employees are unionized, discussions with the applicable bargaining agent should begin now.
For further information on the CPP changes and the impact on your workplace, please contact Kim Ozubko at firstname.lastname@example.org or 416-597-4338 or subscribe to our A.M. Pension Blog and webinar series to stay informed on latest developments.