Transcript - Episode 5: Canada Pension Plan Enhancement – Introduction
Please note that some information contained in this recording pertains specifically to Phase One of the Canada Pension Plan Enhancement and may not be applicable under the second Phase.
Host: Hello and welcome to the Canada Revenue Agency’s payroll podcast. On today’s episode I’ll be speaking with Kevin, Director General of the Business Compliance Directorate within the CRA about the Canada pension plan enhancement that will be effective on January 1st 2019 in all provinces and territories other than Quebec. We’ll be discussing some of the changes for businesses, the self-employed and individuals. But first I ask Kevin to give us a brief overview of the current Canada pension plan to put in to perspective what will be changing.
Kevin: 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. What this means is that someone whose earnings are at or above the YMPE throughout their working life would receive the maximum CPP retirement pension, which in 2017 dollars is about $13,000.
Host: OK that makes sense so, and how is the Canada pension plan funded?
Kevin: The Canada pension plan is funded jointly between employers, employees and the self-employed. At this time, the total contribution rate is 9.9% of pensionable earnings based on the year’s YMPE, meaning that each of the employer and the employee pay 4.95%.
Host: And what about the self-employed?
Kevin: If you’re self-employed, you contribute the entire amount, the 9.9 as you are essentially employer and employee.
Host: Alright, you’ve explained that the CPP provides a basic level of income replacement upon retirement. I’ve looked in to this a little bit more and found out that it does also provide some other benefits, can you talk a little bit about what they are?
Kevin: So, the Canada pension plan provides, in addition to income replacement in retirement, disability benefits, survivor benefits and a death benefit. And I’ll note that, to ensure stable funding for all these benefits, over time, the plan is regularly assessed from an actuarial perspective. The latest assessment shows that it is financially sustainable for the next 75 years.
Host: OK great, now that we’ve had a little bit of a recap of the current CPP, why has it been decided now to make this enhancement?
Kevin: So it’s timely to make some changes and enhancements to the Canada pension plan. We’re observing some changes in our environment in terms of retirement and income. Certainly, fewer workplace pensions are being offered, the nature of pensions that are being offered are changing, particularly as we see defined benefit switching in to defined contribution plans. There is also an assessment of the population approaching retirement that suggests there are quite a number of people at the risk of under-saving and not being prepared for their retirement years. Finance Canada has undertaken substantial research showing that roughly a million families approaching retirement may not be saving enough.
Host: OK so you’ve explained why now is the right time for an enhancement to the Canada pension plan. But, in today’s dollars, what does the enhancement mean?
Kevin: At maturity, in terms of the enhancement, what we’re talking about is about a 50% increase in the maximum benefit. So, we had said earlier that the maximum benefit is currently around $13,000 annually. Under the enhanced plan, the new maximum retirement pension would be in the neighbourhood of about $20,000 a year, for someone with earnings at or above the new upper earnings limit throughout their career. The percentage of pre-retirement income that is being replaced is increasing from one-quarter to one-third of the maximum pensionable pre-retirement earnings.
Host: Right, and you had mentioned an important term there – the new upper earnings limit – this is the first that we’ve heard about that and I just want to point out that we will be discussing it more in the next episode of the series.
Coming up after the break, I’ll ask Kevin to talk about how the enhancement will be funded, as well as what employers need to know about calculating and remitting the enhanced portions of their CPP contributions. We’ll be right back.
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Host: Before the break, Kevin explained some of the fundamental changes that will take place to the Canada pension plan, including approximately a 50% increase in benefits upon retirement compared to today’s benefit. But how will the enhancement be funded?
Kevin: So, the enhanced portion is funded in the same way the core plan is funded, that is through employee, employer and self-employed contributions. And given that the benefit is going to be increased over the course of time that means that the amounts that employers, employees and the self-employed contribute will also have to increase to ensure the sustainability of the plan.
Host: OK and is it mandatory for everyone to contribute to the enhanced portions as well?
Kevin: Yes, just as with the core plan, everyone will be contributing to the enhanced portion.
Host: Alright, now that we have a little bit of a better understanding of some of the changes that will be taking place with the Canada pension plan through this enhancement, it’s important to discuss what this means when it comes to calculating and remitting CPP contributions. Compared to today, are employers going to have to change how they do this?
Kevin: No, employers will not need to do separate calculations they’ll continue to calculate and remit in the same way that they do now using the same tools that we provide, such as the payroll tables and payroll formulas. I also want to note that with respect to reporting of these amounts at the end of the year for employees, there is no new box on the T4, we’re using all the existing provisions of the T4 to report CPP contributions an employee has made over the course of the year.
Host: OK so just to be clear, employers will not need to make a separate calculation for the enhanced portion of the Canada pension plan.
Kevin: No, employers will not need to do a separate calculation. We’ll make use of the payroll tables so that they can do a single calculation and a single remittance. So we’ve worked very hard to make this as simple and as straight-forward for employers knowing that they undertake already a significant amount of work to be compliant with respect to their payroll obligations.
Host: OK perfect, and from my understanding employers currently receive a tax deduction for the contributions they make to the CPP, will they continue to receive this on the enhanced portions as well?
Kevin: That’s correct, employers will continue to receive a tax deduction for their portion of the contributions to the Canada pension plan. Currently employee contributions to the core Canada pension plan are treated as tax credits on a tax return. The contributions to the enhanced portion of the CPP will be tax deductible. There’s an objective in this, by providing a tax deduction for the employee contributions associated with the enhanced portion of the Canada pension plan, as opposed to a credit, the intention is to avoid increases in the after-tax cost of savings for Canadians.
Host: So when it come to the self-employed, you had mentioned that they essentially contribute both the employee and the employer share. How will the tax deduction impact them?
Kevin: The self-employed will continue to receive a deduction for the employer share of contributions to the Canada pension plan, including the contributions to the enhanced portion of the CPP. As an individual, or an employee filing a tax return, they would receive a tax credit for the employee share associated with the core portion of the Canada pension plan, and contributions to the enhanced portion of the Canada pension plan are treated as a tax deduction.
Host: Thank you for listening to the CRA’s payroll podcast. Today’s episode was part-one of a two-part series on the Canada pension plan enhancement. On our next episode, I’ll speak with Kevin about some more of the potential impacts for individuals as well as the different phases of the enhancement. If you have any questions about the show, if you’d like to give feedback, or if you’d like to request a topic for a future episode you can email us at email@example.com, we’d love to hear from you.
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