Webinar: Enhanced Canada Pension Plan for Businesses
Hello, and welcome to our Enhanced Canada Pension Plan webinar. My name is Ben and I am your presenter.
Today's webinar will be recorded and posted at a later date on the Canada.ca website.
If you have questions on other tax-related matters, please contact the CRA's business enquiries line at 1-800-959-5525. You can also visit Canada.ca, and search for "Recorded webinars for businesses." Those webinars will help you with different aspects of payroll and more.
Starting on January 1st, 2019, the Canada Pension Plan (CPP) will gradually be enhanced. Working with provinces to enhance the Canada Pension Plan was a priority of the Government of Canada under the Budget 2016 to improve retirement income security for working-age Canadians. This means employees will receive higher benefits in exchange for making higher contributions together with their employers.
The Enhanced CPP will meet emerging economic challenges by providing a reliable source of retirement income for today's workers. It will gradually replace one-third of employees' earnings, up from one quarter. It will also increase the limit on pensionable earnings. As a result, pension amounts will increase by between 33% and 50% depending on the earnings of the employee. The enhancement will also increase the amounts of CPP disability and survivor benefits.
The enhancement initiative will be fully implemented by 2025. However, a person will have to contribute to the enhancement for 40 years to get the full increase in benefits. This means the enhancement will help young workers and future workers the most.
It is important to note that the enhancement will not affect the amount of CPP benefits that individuals are currently receiving.
The CPP enhancement will not affect employees who only work in Quebec. They will continue to contribute to the Quebec Pension Plan (QPP). However, the Quebec government has introduced legislation to enhance the QPP in a similar fashion, which will also begin in 2019. It is expected that the two Plans will work together to integrate their enhancement benefits, as they have for the existing (or base) benefits.
The Canada Pension Plan is a contributory pension plan that provides a basic level of earnings replacement upon retirement. At this time, it replaces a maximum of 25% of earnings up to, what we call, the year's maximum pensionable earnings, or YMPE. The YMPE is based on the average wage and is currently set at $55,900. What this means is that someone whose earnings are at or above the YMPE throughout their working life would receive the maximum age 65 CPP retirement pension, about $13,600 annually in 2018. However, the average pension is less that that – roughly $7,700 annually.
Under the enhancement, the CPP's replacement rate will increase from 25% to 35% and the pensionable earnings limit will also increase by 14%.
This means that at maturity, after 40 years of contributing to the enhanced CPP, retirement benefits will increase by between 33% and 50%. So, we had said earlier that the maximum benefit is currently around $13,600 annually. With the enhanced plan, the new maximum retirement pension would be in the neighbourhood of $20,400 annually, for someone with earnings at or above the new upper earnings limit throughout their career. By 2023, the percentage of pre-retirement earnings replaced by the CPP will increase to a third instead of a quarter of maximum pensionable pre-retirement earnings. The Yearly Maximum Pensionable Earnings will increase by approximately 14% by 2025.
To fund this enhancement, the annual CPP contributions for employers and employees will increase modestly over seven years, starting in 2019. And once again, it's important to note that CPP benefits will increase based on how much and for how long a person contributes to the enhanced CPP. To get the full increase, a person must make full contributions to the enhanced CPP for 40 years.
To avoid increasing the after-tax cost of saving for Canadians, we are providing a tax deduction for employee contributions to the enhanced portion of the CPP. It means that Canadians who have pension plans that reduce employee pension contributions – which are deductible – will not experience an increase in tax as a result of replacing a dollar of pension plan contributions with a dollar of CPP contributions.
Employers will continue to receive a tax deduction for their contributions to the CPP – that is, for contributions to both the base and the enhanced portions of the CPP.
Self-employed individuals will continue to receive a deduction for the employer share of contributions to the CPP, including the contributions to the enhanced portion of the CPP.
Employees and self-employed individuals will continue to claim a tax credit on employee contributions and employee-share contributions to the base CPP, respectively.
Associated with the enhancement to the Canada Pension Plan, Budget 2018 announced that the Working Income Tax Benefit (WITB) will be replaced by the Canada Workers Benefit (CWB) as part of the enhancements that are designed to roughly offset the incremental CPP contributions for those who are eligible.
Higher contributions will be phased-in gradually over seven years starting on January 1, 2019.
Employees and employers will contribute more on earnings up to the maximum amount of eligible earnings under the CPP. This will be phased in over the first five years. As of 2023, the CPP contribution rate will be one percentage point higher (from 4.95% to 5.95%) for both employers and employees. People who are self-employed pay both shares, so their contribution rate will be two percentage points higher.
Beginning in 2024, a contribution rate of 4% for both the employers and employees (eight percentage points for self-employed individuals, who pay both shares) will apply on earnings between the year's maximum pensionable earnings (YMPE) and the new upper earnings limit, which will be increased in two steps in 2024 and 2025. The projected upper earnings limit for enhanced CPP contributions is projected to be $79,400 in 2025, which is 14% higher than the YMPE.
Once the enhancement is fully implemented in 2025, a contribution rate of 5.95% for both employers and employees will apply on earnings up to the projected YMPE. A contribution rate of 4% will apply on earnings above this projected YMPE up to the projected new upper limit, which is called Year's Additional Maximum Pensionable Earnings (YAMPE).
This table outlines the change in contributions for various earning levels.
There are two phases. The first deals with the increase to the contribution rate. We will see an increase to the contribution rate of 2% phased in over the course of five years, and that 2% is shared by the employer and the employee, 1% each. At the start, in 2019, the increase begins at just 0.15%, but it ramps up year-over-year so that, by 2023 we will have achieved the full 1% increase for each of the employee and the employer.
The 2nd phase involves a movement upwards of the yearly maximum pensionable earnings limit. So, there will be a two-year phase-in to increase the upper earnings limit by 14%. Beginning in 2024, there will be a separate contribution rate of 8% - 4% each for employees and employers - that will be implemented for the earnings between the current YMPE up to the new upper earnings limit, the YAMPE. That limit will also be phased in over two years, reaching 14% above the YMPE in 2025.
Let's see some examples on how this will apply.
Here we have an example of an employee who earns $20,675 annually. The column on the right explains what, as an employer, your contributions amount will be on a bi-weekly basis.
Currently in 2018 the total CPP deductions are $850.16 for an employee at that earnings level which means that your CPP contributions are $32.70 bi-weekly.
As you can see from the table, in 2019 your bi-weekly contributions will increase by 0.15% for a contribution rate of 5.1% annually. This increase will amount to contributions of $33.69 bi-weekly.
The table on the screen shows you the contribution rates for subsequent years.
Because the income is below the YMPE, they will not be subject to the additional 4% contribution rate applicable after 2023 and their rate will remain at 5.95% until such a time that their income goes above the threshold.
Here's another example where an employee earns $41,350 annually. The column on the right is the CPP contributions amount on a bi-weekly basis.
Currently in 2018 the total CPP deductions are $1,873.58 for an employee at that earnings level which means that your CPP contributions are $72.06 bi-weekly.
As you can see from the table, in 2019 your bi-weekly contributions will increase by 0.15% for a contribution rate of 5.1% annually. This increase will amount to contributions of $74.24 bi-weekly and so forth for subsequent years.
Because the income, like the previous example is below the YMPE, they will not be subject to the additional 4% contribution rate applicable after 2023.
To help illustrate the changes, we are going to use an example of an employee who currently earns $82,700.00 on an annual basis. This salary is above the projected YAMPE for the year 2025.
The table reflects what you as an employer will be contributing bi-weekly.
For 2018, using this example, as an employer you are currently contributing $150.78 on a bi-weekly basis up to the YMPE of $55,900.00
Starting on January 1, 2019 the following changes to the annual contribution rates will be as shown in the table.
In 2024, a new upper earnings limit will be extended by 7% to an estimated $72,400.00 and by 2025 it will be raised by another 7% to the total increase of 14% to an estimated $79,400.
Please note the assumption for these values, is that the YMPE increases by the Consumer Price Index and the YAMPE maximum will be 1.14% x YMPE.
It was important for the program to minimize the impact on business as much as possible so employers aren't overburdened with administrative tasks and costs. There will be no changes in the way withholding and remittances to the CRA are made for the regular CPP and the enhanced portion.
We have also ensured that employers will not need to fill in any additional information when filing out the T4 slips. No new boxes will be created. The total contributions deducted will continue to be reported in box 16 and the total pensionable earnings in box 26 of the slip.
The CRA will release the annual Payroll Deductions Formulas (Guide T4127) in November. The formulas will reflect the change in rates concerning the enhanced portion of the CPP.
The T4032 Payroll Deductions Tables and the T4008 Payroll Deductions Supplementary tables will be available in December 2018.
To offset the higher CPP contributions for low-income workers, they will be able to apply for the new Canada Workers Benefit (CWB) announced in Budget 2018 that will replace the Working Income Tax Benefit (WITB). It is a refundable tax credit intended to provide tax relief for eligible working low-income individuals and families who are already in the workforce and to encourage other Canadians to enter the workforce.
In short, eligible workers will be able to access the full benefits of the CWB more rapidly, and its benefits will fall off more slowly in terms of the income stream. While eligible, the benefits will also be greater across that income range.
This slide gives you a summary of the milestones of the CPP Enhancement from when Bill C-26 received Royal Assent in December 2016, to the start of the five-year phase-in contribution rate increases in January 2019, to the full enhancement phased-in in January 2025 and the first full pensions paid by the Enhanced CPP in 2065.
If you are looking for more information, you can check the Finance Canada and the Office of the Superintendent of Financial Institutions websites. The CRA will release the updated payroll deduction formulas in November 2018.
You can also go on the Canada.ca website and search for Enhanced Canada Pension Plan and the Canada Workers Benefit.
We also have a podcast on the Enhanced Canada Pension Plan that you can listen to at your convenience.
We have reached the end of this webinar. Thank you for joining me today. I hope that the information we reviewed during this webinar will be useful to help you meet your payroll obligations.
Thank you for watching.
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