Webinar: Self Employed: What the Canada Pension Plan Enhancement Means for You
Hello, and welcome to our webinar called "Self-employed: What the CPP enhancement means for you." My name is Mathew, and I am your presenter here today.
We’re going to discuss how the enhancement of the Canada Pension Plan (the CPP) will affect you as a self-employed individual in the coming months.
We will tell you about your CPP contributions and what you need to know to file your 2019 income tax and benefit return. This information will also help you plan and budget in the coming year.
If you are an employee and want more in-depth information on the enhancement, the CPP and your pension benefits, go to Canada.ca/businesses-video-gallery for the recording of our CPP enhancement webinar for individuals.
If you are an employer, you may be interested in the recording of our webinar for businesses.
Today’s webinar is hosted by the Canada Revenue Agency and Employment and Social Development Canada, in collaboration with the Department of Finance Canada.
Please keep in mind that the estimated dollar figures we use in our examples are for illustrative purposes only.
Now, let’s get started.
Self-employed individuals make up 16% of the Canadian workforce.
We know that many Canadians do not have a pension and are preparing for retirement on their own.
The CPP enhancement will be particularly helpful to you in reaching your retirement goals.
So what exactly defines a person as self-employed? The answer may not be as clear as you think.
There are many factors that make you self-employed and not an employee.
These can include the level of control you have over your activities, the degree of financial risk you take, your opportunity for profit and much more.
Here are a couple of examples of self-employment:
Mark is a freelance photographer.
He works independently taking contracts directly from his clients through his website.
He can be selective about who he works for and typically works one event per client.
He has control over his hours and how much he charges, and he owns all of the financial risk. Mark is solely responsible for his camera and photography equipment, and he cannot operate his business without them.
Sally is a landscaper who landed a long-term contract for a large office building.
Her contract states that the job must be done in three months.
It’s a big job, so she hires workers to complete the work.
Sally is responsible for paying the workers, including herself with the budget from the contract.
She does not receive benefits or worker’s protection. If Sally does not complete the job, she is financially liable.
I recommend that you take a look at the CRA’s guide called "Employee or Self-Employed?" You can find the guide by visiting the Canada.ca website.
Search for the name of the guide or its identifier, which is RC4110. The guide will help you determine if you are self-employed.
We will move on with the assumption that you are self-employed.
Let’s find out what the CPP enhancement means for you.
We will talk about:
- How the Canada Pension Plan works
- How the enhancement will affect your contributions
- And what you need to know at tax time.
Now we will discuss how the Canada Pension Plan works.
And for those of you who attended our earlier webinars, this part will be a bit of a review.
First of all, what exactly is the Canada Pension Plan?
The Canada Pension Plan or CPP is a mandatory pension plan financed by contributions from employees, employers and self-employed individuals.
The CPP provides a basic level of income for contributors on their retirement and in case of disability. The CPP also provides a death benefit for a contributor’s estate.
With very few exceptions, every person over the age of 18 who works in Canada outside of Quebec and earns more than $3,500 per year must contribute to the CPP.
If you earn less than $3,500, you do not contribute to the CPP.
As a self-employed individual, your CPP contributions are calculated based on your net self-employed pensionable earnings, plus any taxable benefits, up to the year’s maximum pensionable earnings (or, the earnings ceiling.)
CPP contributions are calculated on earnings between $3,500 which is the minimum amount and the earnings ceiling, which is the maximum amount.
The earnings ceiling is set each year by the federal government using a formula based on the growth in average wages and salaries in Canada.
Since the earnings ceiling for 2018 is $55,900, it is mandatory that you make CPP contributions on your self-employed net earnings between $3,500 and $55,900.
If you earn more than the $55,900 in 2018, you are not required or allowed to make additional contributions to the CPP.
If you have multiple sources of income, for example, if you are an employee and self-employed, you must make contributions on both sources of income up to the annual maximum or earning ceiling of $55,900.
Employees contribute at a rate of 4.95% of pensionable earnings, which is the base contributions, and is matched by employers.
As a self-employed person, since you wear both hats, you contribute at a rate of 9.9%.
Your CPP contributions are calculated based on your pensionable earnings.
What changes come with the Canada Pension Plan enhancement?
Currently, the base CPP replaces up to 25% of your average pre-retirement income up to the earnings ceiling of $55,900.
Once mature, the CPP enhancement will increase the maximum CPP retirement pension by about 50%.
It will also increase the survivor and disability pensions.
The amount of increase depends on how much and for how long you have paid into the CPP and, in some cases, your age.
The full impact of the enhancement on pension benefits will only be realized many years down the road.
For more information on pension benefits, please view our CPP enhancement webinar for individuals or visit us on the web at Canada.ca/cpp-enhancement-self-employed.
Investment in the enhancement begins January 1, 2019, with a slight increase in CPP contribution rates.
The increases will continue gradually over seven years, allowing you time to adjust.
There are two phases to the enhancement.
The first takes place from 2019 to 2023.
During phase one, your total contribution rate of 9.9% will increase by 0.3% in each year of 2019 and 2020.
It will then increase an additional 0.4% for 2021, and 0.5% in each of 2022 and 2023.
That means that by 2023, your contribution rate will have increased by 2% for a new rate of 11.9%.
Phase 2 of the enhancement will start in 2024 and will introduce a second earnings ceiling.
You will only need to contribute 8% only on the part of your earnings that are between the first earnings ceiling and the second earning ceiling.
This second set of contributions is also mandatory, and much like we previously explained, if you earn more than the second earnings ceiling, you are not required or allowed to contribute more to the CPP.
Now, let’s take a look at some examples of how much self-employed individuals will contribute to the enhanced CPP after it is fully implemented.
Keep in mind that all amounts are estimates for illustrative purposes only.
Anne is self-employed and earns around $50,000 a year.
This chart shows what her annual contributions will be under the enhancement.
Her contributions gradually increased from 2019 to 2023, up to the new maximum of 11.9%.
Because Anne’s income is below the first annual earnings ceiling, she will not be affected by phase 2 of the enhancement.
So as you can see, her contributions will stay the same in 2024 and 2025.
Let’s take a look at another example.
This is Scott, he is also self-employed. His earnings are $75,000 annually.
His contributions to the CPP will look like this.
You will notice that Scott’s contributions continue to rise under phase two of the enhancement.
This is because his income is above the first annual earnings ceiling.
He will therefore contribute 8% on earnings between the first annual earnings ceiling and the second annual earnings ceiling.
Let’s look at what the CPP enhancement means for you at tax time.
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 incorporate the CPP enhancement modifications and no further changes in the filing process are required.
But, if you decide to file your return on paper, you will need to do a bit of extra work.
This involves separating your contribution amounts into the base and enhanced CPP parts. You must do this to determine tax credits and deductions properly.
Schedule 8, included with your individual income tax and benefit package, will guide you through the calculations.
Currently, you can claim a non-refundable tax credit on 4.95% of your pensionable earnings and a tax deduction on 4.95% of the same earnings.
A non-refundable tax credit means you don't receive a tax refund if they total an amount larger than the taxes you owe.
You will continue to do this under the CPP enhancement, but you will also be able to claim a tax deduction on the enhanced part of your contributions.
These changes will apply to your income tax and benefit return for the 2019 tax year.
We will now take a look at how to calculate contributions, so that you can properly claim your tax deductions and credits under the CPP enhancement.
We will assume that we are in the year 2025 with a first earnings ceiling of $69,700 and a second earnings ceiling of $79,400.
In this case, Anne and Scott will both be required to separate their base and enhanced contributions.
But Scott will have a few extra steps.
First, Anne will calculate her tax credits by taking her earnings of $50,000 and subtracting the $3,500 basic exemption, for a total of $46,500.
Next, she will multiply this amount by the CPP contribution rate of 4.95%, giving her an amount of $2,302, for which she will claim a tax credit.
To calculate the amount that she will claim as a tax deduction, Anne will first multiply $46,500 by 4.95% again, to get $2,302. Next, she will multiply $46,500 by 2%, giving her a total of $930. Adding up both amounts, Anne will be able to claim $3,232 as a tax deduction.
Since Anne’s earnings are below the first earnings ceiling, no further calculations are required.
Scott will begin his process by completing the same steps that Anne did.
But since his earnings are above the first earnings ceiling, he will calculate the tax credits and deductions using the amount between the first and second earnings ceiling. Therefore, he will subtract the basic exemption from $69,700. This will give him a total of $66,200 of pensionable earnings, which he will multiply by 4.95% to give him a total of $3,277.
This is the amount that Scott can claim as a tax credit.
Scott will repeat this process to calculate his tax deduction of $3,276.90. But under the enhancement, Scott will also multiply $66,200 by 2% which will give him $1,324.
This amount is also tax deductible. However, Scott is not done yet.
Assuming that the first earnings ceiling in 2025 is $69,700 and the second earnings ceiling is $79,400, Scott’s earnings are higher than the first earnings ceiling, but lower than the second.
We therefore take his earnings of $75,000 and subtract the first earnings ceiling.
This will give Scott an amount of $5,300 which he will multiply by 8% for a total
This amount will also be tax deductible.
Scott therefore makes CPP contributions of $8,301.80, of which $3,277 he will claim as a tax credit and $5,025 as a tax deduction.
Before we wrap up, we’d like to share some of our services with you that may help you manage some of your financial affairs more conveniently.
The CRA’s My Account lets you track your refunds, view or change your return, check your benefit and credit payments, view your RRSP limit, set up direct deposit, and receive online mail all in one place.
As a business owner, My Business Account lets you access your accounts for GST/HST, payroll, corporation income tax, excise tax, and excise duty, and other levies online.
To provide peace of mind that your taxes will be paid on time, you can authorize the withdrawal of a pre-set amount from your account on specific dates.
This can be set up with My Business Account.
Another handy web tool is the CRA’s BizApp that you can find on the CRA website, which lets you access accounting transactions, pay outstanding balances, and more.
Thank you and have a good day.
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