Why are these changes needed

On January 1, 2019, the Federal government started making enhancements to the Canada Pension Plan (CPP). These changes are being made to cope with the increasing number of people who will be retiring in the future without any savings.

Right now there are about 4.8 million people in Canada over the age of 65 and in the next 25 years this figure will double to about 9 million and will make up a quarter of the population of the country.

These changes are needed now because according to government figures, one in four families close to leaving the workforce is at risk of not having enough savings to maintain their lifestyles after retirement.

Canadians entering the workforce right now will see the largest increase in benefits from these enhancements because they will be contributing for the next 40 years.

Here is a brief overview of the changes which we can expect in Phase 1 and Phase 2.

Phase 1

Phase will is going to last from 2019 to 2024. During this period the annual contribution rate on income above $3500 to the yearly maximum of pensionable earnings (YMPE) will go from 4.95% to 5.95% for employees and employers. In terms of dollars, this increase means that the YMPE will probably go up to $69,700 in 2024 as compared to $58,900 in 2018.

If you are an employee, contributions at the basic rate of 4.95% will continue to give you a non-refundable tax credit on your personal tax return. The additional 1% will be allowed as a deduction from your net income for tax purposes.

For self-employed individuals, there will be a gradual increase in contribution rates from 9.90% to 11.90%. The first 4.95% will provide a non-refundable tax credit on the personal tax return while the balance will be allowed as a deduction from the net business income for tax purposes.

Phase 2

During this period (2024-2025) the government will introduce an additional contribution limit in excess of the YMPE limit. It is estimated that this additional limit will apply to earnings between $69,700 and $79,458. Employees will contribute 4% on this limit while the self-employed will contribute 8%.

Contributions made by employees and the self-employed on the additional limit will be deductible for tax purposes. For employers, the full portion of the basic and enhanced CPP contributions on behalf of their employees will remain deductible from the business income.  

For more clarification on how these changes might affect your business, get in touch with us today.