Webinar: Enhanced CPP & You
Hello, and welcome to our webinar: the Canada Pension Plan Enhancement and You. My name is Maurice and I am your presenter.
Today we're going to discuss how the Canada Pension Plan enhancement will affect you as an employee or self-employed individual. If you are an employer, you can visit canada.ca where you will find a recording of the webinar for businesses and employers that was held in March.
Today's webinar is jointly hosted by the Canada Revenue Agency and Employment and Social Development Canada also known as ESDC. ESDC is responsible for providing benefits and allocating pension payments to CPP recipients, while the CRA is responsible for collecting contributions from employees, employers and self-employed individuals.
If you have a question on a tax subject unrelated to the Canada Pension Plan enhancement, please don't send it to us here. You can call the CRA's individual enquiries line at 1-800-959-8281 or visit canada.ca/taxes.
All contribution amounts and examples we discuss today are estimates. Please take this into consideration as we go over the webinar.
Now, let's get started.
Did you know that an estimated 24% of Canadian families nearing retirement may not have enough income when they leave the workforce?
That's over a million families who may not be able to keep their current standard of living after retirement.
There are a number of reasons for this:
- Fewer workplace pensions
- Canadians are living longer, and
- Increased debt load.
The CPP enhancement is designed to provide better retirement security for all Canadians.
The enhancement will be phased-in gradually over a 7-year timeframe, allowing employers and employees to adjust to the changes.
What exactly does the CPP enhancement mean for you?
That's what we'll talk about today.
First, we'll briefly explain how the Canada Pension Plan works.
Second, we'll tell you about the changes that come with the enhancement and what they mean to your paycheque and your retirement income.
Third, we will tell you what you need to know at tax time.
And finally, we'll take some time for your questions.
So, how does the Canada Pension Plan work?
Most employees in Canada over the age of 18 contribute either to the CPP or to the Quebec Pension Plan – also known as the QPP.
The Canada Pension Plan is managed jointly by the federal and provincial governments. Quebec manages and administers its own plan. Benefits from either plan are based on pension credits accumulated under both plans.
For more information on the QPP, visit the Retraite Québec website at retraitequebec.gouv.qc.ca.
The CPP is funded through investment income and mandatory contributions from employees, employers and those who are self-employed.
The plan began in 1966, and from that time, workers age 18 and older contribute to the CPP.
The amount you contribute is based on your employment income. You make contributions only on your annual earnings between a minimum and a maximum amount.
Employees contribute at a rate of 4.95% of pensionable earnings, with their employers matching their contributions, while self-employed individuals contribute both the employer and the employee portion at a rate of 9.9%.
Your CPP contributions are calculated based on your "pensionable earnings".
Pensionable earnings are your gross earnings, plus any taxable benefits up to the earnings ceiling which I'll explain in the next slide, or yearly maximum pensionable earnings.
The first $3,500 of annual earnings is exempt from contributions. Contributions are calculated on earnings between $3,500 and what is called an "earnings ceiling".
For 2018, that earnings ceiling is $55,900.
The earnings ceiling is set each year using a legislated formula based on the growth in average weekly wages and salaries in Canada. It is also known as the maximum annual pensionable earnings. We will refer to it as the earnings ceiling here – to keep things simple.
Since the earnings ceiling in 2018 is $55,900, your 2018 CPP contribution will be calculated on your earnings from $3,500 to $55,900.
If you earn more than $55,900 in 2018 – that is more than the earnings ceiling – you are not required or allowed to make additional contributions to the CPP on this amount.
So what about retirement benefits?
While many Canadians associate the CPP with the retirement pension, the CPP also provides contributors and their families with income protection in retirement as well as disability and death benefits.
The CPP administers the largest long-term disability plan in Canada.
It pays monthly benefits to eligible contributors with a disability and to their dependent children.
In the event of death, the CPP provides a monthly survivor's pension, a lump-sum death benefit, and a monthly benefit to the dependent children of the deceased.
It's important to note: aside from the post-retirement beneficiaries, everyone must apply to receive their CPP benefit.
These benefits are not paid automatically.
What does the enhanced Canada Pension Plan mean for you?
How much will benefits increase?
Most benefit calculations are based on how much and for how long you have paid into the CPP and, in some cases, your age. Right now, the Canada Pension Plan replaces 25% of a worker's eligible pre-retirement employment earnings.
The maximum benefit someone can receive from the CPP in 2018 is $1,134.17 per month or $13,610 per year.
But, most people don't receive the maximum. To receive the maximum a worker would have had to contribute to the CPP for a full 40 years at the maximum level. The contribution level is determined by your salary level – the more you make, the more you contribute – that is, up to the maximum earnings level we mentioned before. When you make more than the earnings level, your contributions will increase no further. The average CPP benefit at age 65 right now is more in the range of $690 a month.
The enhancement to the CPP basically acts as a top-up to the existing, or base Plan.
Once it takes effect, the enhanced CPP will replace 33.33% of an employee's eligible pensionable income.
In other words, the CPP goes from replacing a quarter to a third of a person's pensionable income.
What's more, the amount of earnings covered by the plan will also increase by 14%.
Under the enhanced CPP, the maximum benefit increases from $13,610 to an estimated $24,906 per year – or by more than half.
On a monthly basis that would be an increase from $1,134.17 a month to $2,075.50 a month for people receiving the maximum.
This is based on a person making maximum contributions to the CPP enhancement for 40 years.
In reality, benefit amounts will vary, but most recipients will get somewhat less than the maximum.
It is important to remember that the CPP enhancement is fully funded. That means the longer and the more you contribute to the CPP enhancement, the greater benefits you will realize.
This change in benefits will occur over a long term period.
Young people who are just entering the workforce, and those who follow them, will benefit most from the enhancement.
What about people at other stages of their work life?
If you have already retired, the enhancement will not affect your CPP benefits.
It may, however, affect any post-retirement benefits that you may earn if you're working in retirement.
If you are planning to start your benefits in the next few years, you won`t receive much of an increase from the enhancement, because you won`t have had much of a chance to make increased contributions.
That said, each year you do contribute to the enhancement will still give you a modest increase.
What if you work in Québec?
If you work in the province of Quebec, you participate in the Quebec Pension Plan which is also being enhanced in a similar fashion. This means that benefit portability will maintain for all workers in Canada. For more information on the QPP, visit the Retraite Québec website.
If you would like more information on CPP enhancement benefits see the Canada.ca website and search for CPP enhancement benefits.
The CPP will be enhanced gradually over a 7 year period, allowing individuals and employers to adjust to the change.
You will have slightly more CPP contributions deducted from each paycheque, starting in January 2019.
As discussed earlier, you now contribute at a rate of 4.95% of pensionable earnings. Phase one of the enhancement starts on January 1, 2019.
That's when contribution rates will increase by 0.15% in each of 2019 and 2020, by 0.20% in 2021 and by 0.25% in each of 2022 and 2023. So, by 2023 and every year thereafter, each employee and employer will be contributing 5.95% annually, for a combined total of 11.9%.
Starting in 2024, contributions will be deducted on earnings above the ceiling up to a newly created second annual earnings ceiling.
Again, the earnings ceiling is the maximum level of earnings the government sets each year for the CPP. If you earn more than that, you are not required or allowed to contribute more to the CPP.
If your pensionable earnings are above the first earnings ceiling, you will contribute an additional 4% on the part of your earnings that are between the first annual earnings ceiling and the second annual earnings ceiling.
However, individuals whose salaries stay under the first maximum earnings ceiling will not need to make these contributions.
Let's look at some examples. Please remember that these examples are estimates only.
Scott makes $41,350 annually.
His current contributions are $72.06 per pay period, which is on a bi-weekly basis.
His contributions will increase slightly with the CPP enhancement. In 2019 he will contribute an additional $2.18 and in 2023 he will contribute an additional $14.56.
Here is a year-by-year breakdown of Scott's contributions to the enhancement.
Scott's contributions gradually increased from 2019 to 2023 up to the new maximum of 5.95%.
Scott will contribute $74.24 in 2019 and he will eventually contribute $86.62 to the CPP in 2023.
Because Scott's earnings are below the first annual earnings limit, Scott will not be affected by phase 2. Therefore his contributions will remain the same throughout 2024 and 2025.
Let's take a look at another example.
Anne's CPP contributions will look something like this.
CPP contributions continue throughout the year until she hits the maximum contribution amount or until year end.
Anne makes $71,000 a year.
Her current CPP contributions are $128.51 bi-weekly. Anne's contributions will increase to $132.40 in 2019, to $141.49 in 2021 and finally to $154.47 in 2023.
Anne's situation is slightly different than Scott's.
Because her pensionable earnings are expected to continue being above the first earnings ceiling, she will need to make contributions on her higher earnings once phase 2 begins in 2024.
Unfortunately, we can't say for sure by how much Anne's contributions will rise in 2024 and 2025 on a bi-weekly basis.
The earnings ceiling that will be set for both of those years is based on multiple factors.
In our last example, we will look at Xu's contributions. Xu has an annual salary of $82,700.
Because of his salary level, like Anne, he will contribute to phase 2. Xu's contributions are $150.78 per pay period, which is bi-weekly.
His contributions will increase to $181.24 in 2023, making a $30.46 increase in his CPP contributions.
While Xu will contribute to phase two in 2024, the contribution amounts have yet to be determined.
You're probably wondering how benefits will increase with the CPP enhancement? Let's take a look at some examples.
Take note that the benefit amounts are estimates only.
Also, for simplicity's sake we are assuming our examples earn a consistent annual salary throughout their working life.
Let's take a look at Peter.
Peter starts working in 2025 at age 25.
He makes $39,700 a year for 40 years.
What will he receive in benefits?
This will be calculated using a number of different factors including his pensionable earnings for every year that he worked, and at what age he starts receiving CPP benefits.
We will assume Peter takes his benefits at age 65.
Without the CPP enhancement, Peter's CPP benefits would be approximately $9,361 annually upon retirement.
With the CPP enhancement in place, Peter will receive a total estimated $12,480 a year in benefits when he retires.
This comes out to around $1,040 a month.
Nadia and Jamal, like Peter, worked for 40 years and also start receiving their CPP pension benefits at the age of 65.
However, Nadia and Jamal's earnings throughout their work lives are higher than Peter.
That means they will have contributed more to the CPP over the years.
This, in turn, affects the amount of pension benefits they will receive.
Nadia has a salary of $69,700 a year.
If the CPP enhancement didn't exist, she could expect to receive only $16,345 in CPP pension benefits.
Now with the enhancement, she will receive $21,911 annually at age 65.
Jamal, who has $79,400 in earnings, would have received $16,435 in annual pension benefits at 65 under the previous CPP.
With the enhancement, he can look forward to $24,960 annually.
Let's look at what the CPP enhancement means for you at tax time.
If you do your taxes electronically, using CRA approved software, there isn't anything you need to do differently. Tax software will have been updated to incorporate the CPP enhancement changes and does the work for you.
If you file on paper, though, there are some things you need to know.
When you do your taxes, your CPP contributions must be separated into two parts. You have your base CPP contributions and your CPP enhanced contributions.
The base contribution is at a rate of 4.95% of which you currently contribute in 2018, and the enhanced portion is any amount above that.
Currently, you can claim a 15% non-refundable tax credit based on your base CPP contributions. You will continue to do so after this enhancement.
However, you will be able to claim a deduction for the enhanced portion of your contributions.
What exactly is the difference between a non-refundable tax credit and a tax deduction?
A tax deduction reduces the amount of income that is subject to income tax, while a non-refundable tax credit reduces the amount of an individual's tax payable for the year. Non-refundable tax credits, like the CPP, are calculated by multiplying the total of the amounts claimed, by the lowest federal tax rate, currently at 15% in 2018.
For example, if you have a tax deduction of $1,000, that amount is subtracted from your income.
If your income for the year was $30,000, it would reduce your taxable income to $29,000.
On the other hand, if you have an amount of $1,000 that can be claimed for a 15% non-refundable tax credit, the tax credit based on an amount of $1,000 will reduce your tax payable for the year by $150.
So, a tax deduction for the enhancement part – reduces your taxable income right off the start. A 15% tax credit for the base CPP part, reduces any taxes payable.
So what if the credit is more than what you owe?
In the case of the CPP, it is a non-refundable tax credit for your base CPP contributions.
That means, it reduces your taxes owing, but you won't receive a refund of any amount over that.
Now, how will you know the amount to claim for a CPP non-refundable tax credit and the amount for a CPP tax deduction?
In other words, will the two amounts be separated on your T4 or other documents?
Your T4 slip will not change.
Your total CPP contributions deducted, both base and enhanced, will be reported in box 16 as a combined amount. There will be no distinction between the enhancement and the base CPP on your T4. Your total pensionable earnings will be reported in box 26 as before.
If you file a paper income tax and benefit return, the CRA forms will guide you through a calculation to determine the base and enhanced CPP contributions, so you can claim the non-refundable tax credit and the tax deduction properly.
If you file your return electronically using commercial tax software that is certified for NETFILE, or you have a tax preparer complete and file your return using EFILE, the tax software will be updated to perform all of the necessary calculations.
To help low-income workers with the higher contributions that come with an enhanced CPP, increased financial benefits will be provided under the new Canada Workers Benefit, a refundable tax credit that will replace the existing Working Income Tax Benefit as of 2019.
This benefit provides financial support to encourage low-income individuals to join or remain in the workforce.
For more information on the Canada Workers Benefit, please visit Canada.ca and search for Canada Workers Benefit.
We have now reached the end of our webinar. Thank you for joining me today. I hope you found today's information helpful.
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