A deeper look at the Canada Pension Plan and Employment Insurance

Transcript

Slide 1

Hello! Thank you for joining me for this webinar, where we will take a deeper look at the Canada Pension Plan (CPP) and Employment Insurance (EI).

This is the first in a series of three webinars offering an in-depth look into employers’ deduction requirements. My name is Hanna and I will be your presenter today.

Last year, we presented an overview of payroll. Now that you have worked on payroll for a year, we’ll take a deeper look at CPP and EI.

This webinar is aimed at individuals who already have a foundation in payroll and are looking to know more about CPP contributions and EI premiums.

Slide 2

For employers, the beginning of a new year means updates of the rates for CPP contributions and EI premiums, as well as the rates for income tax. Why not take the opportunity to learn more about the subject and start the year on the right foot?

With this in mind, here are the topics on today’s agenda:

  • A quick reminder of how the CPP works in broad terms
  • The rates and maximums for CPP contributions
  • A look at the most common special situations
  • CPP overpayments and recovering CPP

Slide 3

Also on today’s agenda:

  • How EI works
  • The rates and maximums for EI premiums
  • Reducing the employer’s premium rate
  • EI overpayments and recovering EI premiums

Slide 4

Let’s start by talking about CPP

Slide 5

The principle of CPP withholdings is simple: every employer who pays an employee has to deduct CPP contributions. In addition to an employee share, the employer also has to pay an employer share. The employer share is equal to the amount deducted from employee earnings.

Now we’ll look at how the required contributions are calculated.

Slide 6

The employer has to deduct CPP contributions based on the rates that apply to the year the earnings are paid. The rates are set every year, and they’re adjusted in line with Canadian economic indicators. We put them on our website around December for the following year.

Here are the rates for 2017:

  • Maximum pensionable earnings: $55,300
  • Annual basic exemption: $3,500 – remains unchanged
  • Maximum contributory earnings: $51,800
  • Rate for calculating contributions: 4.95%
  • Maximum annual contributions: $2,564.10

It is very important to correctly calculate CPP contributions. This is because an error may affect the CPP benefits an employee will receive when he or she retires.

Slide 7

For employees who work in Quebec, employers have to deduct contributions for the Quebec Pension Plan (QPP) instead of the CPP. The rate for QPP contributions differs from the rate for CPP contributions. But the principles are the same—that is, the pensionable earnings and the annual basic exemption amounts are the same for both plans.

You can find more information about the QPP on the Revenu Québec website.

Slide 8

The CPP is a mandatory pension plan and, as a rule, employees are in pensionable employment.  

An employer has to deduct CPP contributions from an employee’s pensionable earnings if the employee meets all of these conditions:

  • The employee is in pensionable employment during the year
  • The employee is not considered to be disabled under the CPP or the QPP
  • The employee is 18 to 70 years old, even if he or she is receiving a CPP or QPP retirement pension (employees under 18 or older than 70 do not contribute to the CPP)

  There is an exception when the employee is 65 to 70 years old. We will look at this situation in more detail later.

Slide 9

An individual’s pensionable earnings for the CPP are generally made up of his or her income earned from an office or employment (which is salary, wages, or any other remuneration he or she received in the year).

Pensionable earnings also include commission income, the value of taxable benefits or allowances, and honorariums that are related to the office or employment. All of these amounts are subject to CPP contributions.

Slide 10

Certain amounts, benefits, employment, and payments are not subject to CPP contributions. They are not included in pensionable earnings and the employer must not deduct CPP contributions from them.

Among the payments that are not subject to CPP are pension payments, lump-sum pension payments, death benefits, and advances or loans made before or after a Workers’ Compensation Board decision.

If you are not certain whether a payment is subject to CPP contributions, please see Guide T4001 or the CRA website.

Slide 11

The employer has to deduct CPP contributions for each pay period from his employees’ pensionable earnings until the maximum pensionable earnings or the maximum employee contributions for the year have been reached. No CPP contribution deductions can be made from the annual basic exemption of $3,500. The exemption has to be split between the pay periods in the year.

The rate to use to calculate CPP contributions is the one that applies to the year during which the payment was made. For example, if you pay an amount to a former employee and you have to deduct CPP, you have to use the contribution rate in effect when you make the payment.

It is important to point out that if an employee has several employers, the year’s maximum pensionable earnings apply to each employment he or she holds, even if the employee reaches the maximum for the year at one of his or her jobs.

This means that each employer has to deduct CPP contributions without taking into account contributions made by other employers.

There may be special situations during the year that require the employer to start or stop deducting CPP for an employee. Let’s look at the ones employers face most often.

Slide 12

We’ll use this simple example.

John’s income for the pay period is $500, and it is all pensionable income.

He is entitled to the basic annual exemption of $3,500. Since John gets paid every week, we divide the annual exemption by the number of pay periods (52) to get a weekly exemption of $67.31.

We subtract the basic exemption from the pensionable earnings to find John’s contributory earnings. We arrive at $432.69.

Then we multiply the contributory earnings by the CPP rate of 4.95% and we get John’s CPP contribution of $21.42.

Sometimes people ask if they can just not withhold CPP from the first $3,500 and then start withholding 4.95% after that. The answer is no. The basic exemption is prorated, or calculated proportionally, throughout the year, so you have to use the math approach we just talked about.

Slide 13

Special situations can arise when an employee:

  • reaches the age of 18 or 70
  • gives his or her employer a Form CPT30
  • is considered to be disabled under the CPP, or
  • dies during the year

Slide 14

In these special situations, the employer has to either start or stop CPP deductions at a specific time during the year for the employee to make sure he doesn’t deduct too much or too little.

It is important that employers start or stop deductions at the right time. Once they know the right time, they will have to prorate, or calculate proportionally, the CPP contributions to figure out the most the employee can contribute for the year. This amount does not represent the contributions actually made for the year.

For employers who have to deduct QPP, the requirements may be different. To find out more, we encourage you to communicate with Revenu Québec.

Now, let’s look at how to prorate, or calculate proportionally.

Slide 15

We already know that the maximum pensionable earnings of $55,300 and the basic exemption ($3,500) are annual amounts.

This gives annual maximum contributory earnings of $51,800 for 12 months (see Slide 6).

To prorate, or calculate proportionally, we multiply the annual maximum contributory earnings by the number of pensionable months in the year, that is, the number of months during which CPP contributions have to be deducted for this employee.

Slide 16

Then, we divide the result by 12.

We then multiply this result by the CPP contribution rate for the year. This will give us the maximum CPP contributions for the employee based on the number of pensionable months.

When the employee has worked the entire year, that is, for 12 months of the year, and his or her pensionable earnings reached the year’s maximum during the year, there is no need to prorate, or calculate proportionally. In this situation, the employer stopped CPP deductions because the annual maximum was reached for this employee.

We will apply this proportional calculation to various special situations that may occur during the year.

Slide 17

No CPP contributions are required from an employee under the age of 18. When the employee turns 18 during the year, the employer has to start deducting CPP contributions from the first pay of the month after the month in which the employee turned 18.

To clarify, let’s look at an example.

Slide 18

  • Charles works for the XYZ Company and he turned 18 on June 15, 2016

Slide 19

  • He earns $1,500 every two weeks
  • His annual salary is $39,000
  • The first pay period in July is July 8 for the period June 27 to July 8, 2016

We will start with the proportional calculation to determine the maximum CPP contributions that apply to the six-month period in which the employer has to deduct CPP from Charles’s pay. We will use the 2016 rates because the event (his birthday) occurred in 2016.

To determine the number of contributory months for this employee for the purpose of prorating, or calculating proportionally, the employer has to count the number of months, starting with the one after the month in which the employee turned 18.

Slide 20

We will look at each step of the proportional calculation.

Step 1: Subtract the annual basic exemption from the maximum pensionable earnings for 2016 ($54,900 minus $3,500). This gives us maximum annual contributory earnings of $51,400.

Slide 21

Step 2: We multiply the result by the number of pensionable months, that is, the number of months during which CPP contributions were deducted for this employee, and we divide by 12. In our example, the employer started deducting CPP contributions in July, which gives us six pensionable months: [($51,400 times 6) divided by 12 equals $25,700].

An employer will have maximum contributory earnings of $25,700 with which to calculate the maximum CPP contributions to deduct.

Slide 22

Step 3: Multiply the maximum contributory earnings by the CPP contribution rate for 2016, which is 4.95%.

This gives us an amount of $1,272.15. This amount represents the maximum CPP contributions that Charles’s employer can deduct for 2016. But it does not represent the amount that is actually deducted over the course of 2016.

Now we’ll go through the steps that Charles’s employer has to go through to calculate the amount of CPP contributions he or she has to deduct during each of Charles’s pay periods.

Slide 23

Step 1: Charles’s employer has to figure out the pensionable earnings for this pay period. In our example, the amount is $1,500 for two weeks.

Slide 24

Step 2: Charles’s employer then has to split the annual basic exemption of $3,500 between the pay periods in the year. Because Charles is paid every two weeks, there are 26 pay periods in the year. Therefore, $3,500 divided by 26 pay periods gives $134.61 per pay period.

Please note that in Appendix 2 of Guide T4001, you will find the basic exemption amounts for several pay periods.

Slide 25

Step 3: The contributory pensionable earnings are $1,365.39, that is, $1,500 in pensionable earnings minus the basic exemption of $134.61.

Slide 26

Steps 4: Charles’s employer then multiplies the $1,365.39 in contributory earnings by the rate that applied at the time of payment, that is, 4.95%. The result is $67.59.

Slide 27

Charles’s employer has to deduct $67.59 in CPP contributions from the pay Charles receives on July 8.

If Charles’s pay stays at $1,500 every two weeks until the end of 2016, his actual CPP contribution for the year will be $878.67, or $67.59 times 13 remaining pay periods.

Slide 28

When an employer is paying an employee who will turn 70 during the year, he has to deduct CPP contributions up to the last pay period of the month in which the employee turns 70. No CPP contributions should be deducted for the pay periods after that.

The employer has to do the same proportional calculation we saw earlier to figure out the maximum contributory earnings. Then he’ll use that figure to calculate the maximum CPP contributions to deduct.

Slide 29

So, an employee who turned 70 on February 12, 2016, should have contributed up to the last pay period in February. The proportional calculation would be as follows:

  • Let’s start by taking the annual maximum contributory earnings in 2016 of $51,400 times 2 months divided by 12 months, giving us proportionate maximum contributory earnings of $8,566.67
  • Then we multiply the result by the annual contribution rate in effect (4.95%), which gives us $424.05

In this case, the employee’s CPP contributions should not be more than $424.05 for the year. If the employer deducted more than $424.05 in CPP contributions in the first two months of the year (this would be the case if the employee is making more than the maximum pensionable earnings of $54,900), the employer has to repay the difference to the employee.

Later we will see how to reimburse CPP overdeductions.

Slide 30

We have seen that an employer has to deduct CPP contributions up to the last pay period of the month in which the employee turns 70.

Slide 31

However, individuals aged 65 to 70 years old in pensionable employment are allowed to stop making CPP contributions, even if they receive a CPP or QPP retirement pension.

To elect to stop contributing, the employee has to fill in parts A, B, and C of Form CPT30 and give it to his or her employer.

The election to stop making CPP contributions does not affect the salary or wages of an employee working in Quebec or an employee considered disabled under the CPP or the QPP. It also does not affect the salary or wages of an employee who has reached the age of 70. Do not deduct CPP contributions from the salary or wages of these employees.

Slide 32

When the employee gives Form CPT30 to his or her employer, the employer will stop deducting CPP contributions on the first day of the month after the date he received the form. So, the employer will continue to deduct CPP contributions up to the last pay period of the month in which the employee gives him Form CPT30.

For the proportional calculation, the employer has to use the number of months before the election takes effect. For example, if the employee gives Form CPT30 to his or her employer in May, the employer will use five months for the proportional calculation (January to May) and will stop deducting contributions in June.

Slide 33

Employees who elected to stop contributing to the CPP in a previous year can elect to start contributing to the CPP again.

Slide 34

The employee can revoke his or her election to stop CPP contributions and start contributing again by filling in parts A, B, and D of Form CPT30 and giving it to his or her employer. But the employee cannot make this election in the same year he or she stopped contributions. An election can be revoked only in a later year.

Obviously, the employee has to be making, or will be making, pensionable earnings.

When the employer receives Form CPT30, he will start deducting CPP contributions again, starting from the first pay period of the month after the month in which he received the form.

For prorating, or calculating proportionally, the employer will use the number of months including the month in which the revocation came into effect.

For example, an employee who elected to stop contributing to the CPP in 2013 can restart his or her contributions in 2016. If the employee gives his or her employer Form CPT30 in July 2016, the employer will start deducting CPP contributions again in the first pay period of the month of August and will use five months for the proportional calculation (August to December).

Now let’s take a look at some of the parts of Form CPT30.

Slide 35

Parts A and B have to be filled in for both situations, that is, when the employee elects to stop CPP contributions and when the employee revokes that election to restart CPP contributions.

In addition to parts A and B, the employee has to fill in Part C to stop CPP contributions.

To revoke that election and restart CPP contributions, he or she has to fill in Part D along with parts A and B.

As I already mentioned, the form electing to stop CPP contributions must have been given to the employer in a previous year for the election to be revoked.

Slide 36

An employee who is considered disabled under the CPP does not have to make CPP contributions.

The employer has to deduct CPP contributions up to the last pay period of the month in which the employee became disabled or was considered disabled under the CPP.

When the employee is no longer considered disabled under the CPP, the employer has to start deducting CPP contributions again in the first pay period of the month after the month in which the employee stopped being considered disabled.

The proportional calculation applies here too.

Slide 37

If an employee dies during the year, the employer has to deduct CPP contributions up to the last pay period of the month of death on the amounts and benefits earned by or due to the employee on the date of his or her death.

The number of months to be used for the proportional calculation includes the month the employee died.

For example, if the employee died in April, the employer would use four months for the proportional calculation.

Slide 38

Now, let’s talk about CPP over contributions.

An employer may find that he deducted more CPP contributions from the employee’s pensionable earnings than he should have.

If the employer finds the mistake during the year, he has to repay the employee for the overdeduction and change his payroll. He can then reduce his next payment to the CRA by the amount of the overdeduction. This amount will be equal to the employee share plus the employer share.

The employer must not include this amount on the employee’s T4 slip because he already repaid it.

Slide 39

If the employer did not repay the overdeduction to the employee, or if the error was not found during the year, the employer can correct the error like this:

Make no changes to the employee’s T4 slip. Show the actual amount of CPP contributions deducted, including the overdeduction. Also show the exact amount of pensionable earnings for the year. The employee will get the overdeducted money back when he or she files his or her income tax and benefit return.

Slide 40

If the employer included the overdeduction on the employee’s T4 slip, he can ask for a refund of his share of the overdeducted CPP contributions by filling out Form PD24, Application for a Refund of Overdeducted CPP Contributions or EI Premiums.

The employer must attach this form to the T4 information return he files at the end of the year. If he files electronically, he can mail the form to his tax centre.

The employer can request a refund of his share of the contributions up to four years from the end of the year he made the overpayment.

Slide 41

If the employer notices that he did not deduct enough CPP contributions from an employee’s earnings, or if the CRA sends a notice of assessment telling him that he didn’t deduct enough, the employer is responsible for paying the balance owing (the employee and employer portions).

However, the employer can recover the employee’s share of the contributions by deducting them from his or her next pay. But, he cannot recover missing contributions that are over 12 months past due.

The amount that the employer can recover for a pay period cannot be more than the amount he should have deducted in the first place. He also cannot deduct more income tax to pay the CPP deficit.

If in one year an employer recovers contributions that he should have deducted in a previous year, he cannot report the amount recovered on the current year’s T4 slip. One option is to change the previous year’s T4 slip. See Guide RC4120 for information on how to do this.

Let’s look at an example.

Slide 42

In the previous year, the employer should have deducted the following CPP contributions from his employee’s pay: $25.30 for September and $25.65 for October.

The employer has to pay the CRA the amount owing of $101.90, representing the employer and employee portions.

For our example, let’s assume that the employee is paid monthly. The employer can recover the missing $50.95 like this:

  • $25.30 from the March pay
  • $25.65 from the April pay

The employer could not recover more than $25.65 in one month because the amount he recovers cannot be more than the amount he should have deducted in the first place.

The current monthly CPP contribution deduction is $26.60.

Slide 43

Now let’s look at Employment Insurance (EI).

Slide 44

Let’s start with an overview of how EI premiums work.

In a way, EI is similar to CPP.  Employment income in Canada is insurable and EI premiums must be deducted from employees’ earnings.

The employer also has to pay a share of EI premiums. The employer’s share is 1.4 times the amount deducted from the employee’s earnings.

This means an employer that deducted $1,000 from his employee’s earnings for a given pay period has to pay $1,400 in EI premiums.

Slide 45

Just like for CPP, there are new premium rates and a new maximum for EI every year.

For 2017, here are the numbers:

  • Maximum insurable earnings for the year: $51,300
  • Premium calculation rate: 1.63%, the lowest in 10 years
  • Maximum annual premium for the employee: $836.19
  • Maximum annual premium for the employer: $1,170.67, which is 1.4 times the maximum employee premium for the year

In Quebec, the rate is different. It is set at 1.27% of the employee’s insurable earnings for the year. This difference is due to the fact that in Quebec, employees and employers have to pay Quebec parental insurance plan (QPIP) premiums. For more information about QPIP, visit the Revenu Québec website.

Slide 46

There is no minimum or maximum age for EI premiums. Nor is there a basic exemption on insurable earnings.

This means that employers have to deduct EI premiums from the first dollar of insurable earnings up to the annual maximum. As soon as the maximum is reached, they have to stop.

Most jobs in Canada are insurable. But there are some amounts and benefits from which employers have to deduct EI premiums and others from which they do not.

Slide 47

The following amounts are included in insurable earnings:

  • Salary, wages, and bonuses
  • Commissions and other remuneration
  • Most taxable benefits and allowances paid in cash
  • Honorariums from employment or office
  • Gifts, awards, and rewards paid in cash
  • Other payments and benefits

Slide 48

However, no EI premiums have to be deducted from what you pay for the following:

  • Jobs where the employer and employee do not deal with each other at arm’s length (like family members)
  • Employment, by a corporation, of a person who controls more than 40% of the corporation’s voting shares

These are the two situations that employers run into most often. For the other situations, see Guide T4001 or visit the CRA website.

If an employer is not sure about the relevance of deducting EI premiums from someone he has a non-arm’s length relationship with, he can get a ruling from the CRA. He can do this by using the Request a CPP/EI ruling option in My Business Account or by filling out Form CPT1, Request for a Ruling as to the Status of a Worker under the Canada Pension Plan or Employment Insurance Act, and sending it to the CPP/EI Rulings Division of his local tax services office.

After the ruling is made that the employer should not have deducted EI premiums, the employer can ask to be repaid any premiums he deducted before the ruling.

In addition, the employer does not deduct EI premiums from:

  • Non-cash taxable benefits (unless there are exceptions)
  • Non-cash gifts, awards, and rewards
  • Earned income that was not paid before an employee’s death

Slide 49

I mentioned earlier that employers have to pay the employer share of EI premiums, which is 1.4 times the employee share.

Some employers who offer their employees a short-term disability wage-loss indemnity plan can get a reduced rate, allowing them to pay employer EI premiums at a lower rate.

Slide 50

The plan has to meet the standards set out in the Employment Insurance Regulations and employers have to register under the Employment Insurance Premium Reduction Program.

Employer premiums will be reduced only for employees covered by the authorized plan.

Slide 51

To register for the Employment Insurance Premium Reduction Program, employers have to send an initial request to Service Canada. To find out about the request, see the EI Premium Reduction Guide. Employers can get this guide at their regional Service Canada Centre or by contacting Service Canada. The contact information is in Guide T4001.

If eligible, the employer will get a rate of less than 1.4 times the employee’s premiums. In this case, he has to open another payroll program account with the same business number to make a separate payment for his employees not covered by the plan. The reduced rate will be applied to the employer’s existing RP account.

The employer has to prepare T4 slips for each RP account.

For example, an employer that deducted $1,500 in EI premiums from his employees’ earnings and got a reduced rate of 1.1 would have to pay $1,650 in employer premiums (which is $1,500 times 1.1).

Slide 52

If an employer notices that during the year he overdeducted EI premiums from an employee’s earnings, he would have to repay the employee the overdeduction and change his payroll records.

The employer can then reduce, in the same calendar year, his next payment to the CRA by the amount of the overdeduction. This amount will be equal to the employee share plus the employer share.

The employer must not include the amount on the employee’s T4 slip because he already repaid it.

Slide 53

If the employer did not repay the overdeduction to the employee, or if he did not notice the error during the year, he can correct the error like this:

Make no changes to the employee’s T4 slip. Show the actual amount of the EI premiums deducted, including the overdeduction. Also show the exact amount of the insurable earnings for the year. The employee will receive the overdeducted money back when he or she files his or her income tax and benefit return.

Slide 54

If the employer included the overdeduction on the employee’s T4 slip, he can ask for a refund of his share of the overdeducted EI premiums by filling out Form PD24 that we talked about earlier.

The employer has to attach this form to the T4 information return he files at the end of the year. If he files electronically, the employer can mail the form to his tax centre.

The employer can ask for a refund of his share of the premiums up to three years from the end of the year he made the overpayment.

Slide 55

You recover EI premiums the same way you recover CPP contributions. This means that if the employer notices that he did not deduct enough EI premiums from an employee’s earnings, or if the CRA sends a notice of assessment saying he did not deduct enough premiums, he is responsible for paying the balance owing (employee and employer shares).

However, the employer can recover the employee’s share of the premiums by deducting them from the employee’s next pay. But he cannot recover missing premiums that are more than 12 months past due.

The amount he can recover during a pay period cannot be more than the amount he should have deducted in the first place. And he cannot deduct more income tax to pay the EI deficit.

If in one year, an employer recovers premiums that should have been deducted in a previous year, he cannot report the amount recovered on the current year’s T4 slip. One option is to change the previous year’s T4. See Guide RC4120 for information on how to do this.

Let’s look at an example.

Slide 56

In the previous year, the employer had to deduct EI premiums from an employee’s pay: $77.00 for September and $75.00 for October.

He has to pay the CRA the amount owing of $364.80, representing $152.00 for the employee share and $212.80 for the employer share ($152.00 times the 1.4 employer rate).

For our example, let’s assume that the employee is paid monthly. The employer can recover the missing $152.00 like this:

  • $77.00 from the March pay
  • $75.00 from the April pay

The employer could not recover more than $77.00 in one month because the amount he can recover cannot be more than the amount he should have deducted in the first place.

The $79.00 for March and April is the current EI premiums to deduct for the month.

Slide 57

For more information on any of the items we talked about today, visit cra.gc.ca and go to our webpages for businesses.

If you have not already done so, you can subscribe to our payroll electronic mailing list at cra.gc.ca/lists. You’ll receive information about our upcoming webinars.

The CRA website also has videos and recorded webinars for businesses at cra.gc.ca/gallery, including a series that gives information on payroll for new small businesses and a series with information on payroll basics.

You can also follow us on Twitter at @CanRevAgency.

Slide 58

The CRA has many tools to help you understand your responsibilities for CPP contributions and EI premiums, as well as other payroll obligations.

You can find them by going to the payroll deduction pages on our website. Guide T4001, Employers’ Guide – Payroll Deductions and Remittances, may be especially helpful.

Slide 59

The CRA will soon present a series of podcasts on taxable benefits. Stay tuned!

That’s all the time we have. Thank you for joining me today. I hope this webinar helped you better understand Canada Pension Plan contributions and employment insurance premiums.

Thank you.

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