The government of Canada is proceeding with an enhancement of the Canada Pension plan with the modifications phased in from 2019 to 2025. The following key changes will apply:
- The CPP enhancement will increase the maximum CPP benefit by approximately 50%. The current maximum benefit is $13,110 and this will increase to approximately $20,000 in current dollars. Enhanced benefits will accumulate over time with younger taxpayers seeing the largest increase in benefits.
- A new 1% premium will be phased from 2019 to 2023, increasing the regular premium rate to 5.95% on pensionable income to $72,500. An additional 4% premium, starting in 2024, will apply to income between $72,500 to $82,700. This will lead to a maximum annual employee / employer CPP premium of $4,513 ($9,026 combined) compared to a maximum of $2,544 ($5,088 combined) in 2016.
- Individuals that do not earn pensionable income, for example individual’s without employment or self-employment income, will not be affected by the changes. Retired persons will not bear additional costs or benefit from the enhanced CPP.
The changes will lead to significant incremental costs for most employers and should be contemplated in forecasting exercises. Employers will want to consider avenues to minimize the burden, for example use of self-employed contractors will be a more attractive option in the future. Business owners may avoid CPP premiums by receiving distributions from a corporate group in the form of dividends instead of remuneration. The benefits of avoiding CPP premiums should be weighed against decreased CPP benefits upon retirement.