On June 20, 2016 at the Federal- Provincial- Territorial Finance Minister’s Meeting in Vancouver, an agreement in principle was reached on Canada Pension Plan (CPP) enhancement.
The primary objective of the CPP enhancement is to increase the retirement replacement rate from 25% of final average income to 33.33% for retirees with a full working career, defined as 40 years or greater. Secondly, the CPP revisions will increase the earnings ceiling for contribution and benefits purposes. Young Canadians just entering the workforce will see the largest increase in benefits.
In order to achieve these objectives, the contribution rate will gradually increase, commencing January 1, 2019, for all Employers and Employees. The contributions maximum will increase from the 2016 level of $54,900 to $82,700 by 2025. Full revisions will be phased in over a seven-year period to allow businesses to fiscally plan for these changes.
Contribution rates will be increased over 5 years commencing January 1, 2019. Thereafter the maximum earnings limit will then be increased over the following 2 years. The separate CPP contribution rate on income between $54,900 and the eventual $82,700 is expected to be 4% each for both employers and employees. Current retirees will receive no additional money from the CPP as part of the revised arrangement.
How will CPP revisions impact Employers?
Although not yet finalized, the increase to employer contributions will be approximately 1% of pensionable earnings over the current rate of 4.95%. Employer CPP contributions will remain fully tax deductible. For an employee with a salary at the current $54,900 ceiling, employers will pay an extra $6 a month by 2019, which will rise to $43 a month by 2023.
What does this mean for Employees?
The increase to employee contributions will also be approximately 1% higher than the current rate of 4.95%. For an employee with a salary at the current $54,900 ceiling, they will pay an extra $6 a month by 2019, which will rise to $43 a month by 2023. The enhanced portion of employee CPP contributions will now be tax deductible. Currently, employee CPP contributions receive a tax credit. To offset any financial impact to lower-income Canadians, the federal government has agreed to expand an existing refundable tax credit known as the working income tax benefit (WITB) to offset the higher CPP premiums. RRSP contribution room will not be affected by the CPP enhancement.
What should Employers do?
Final details are not known at this point, however, The Leslie Group encourages every Employer to become familiar with the CPP expansion to help determine the cost impacts to their business.
CPP enhancement is designed to strengthen the government portion of overall retirement savings for Canadians which can be separated into 3 pillars: government plans, company sponsored retirement plans, and personal retirement plans and savings. CPP was never intended to be sole source of retirement income for employees.
The Leslie Group is closely monitoring the CPP and will provide updates as they become available in order to assist you with guidance as it pertains to your programs.
The Leslie Group can be reached at (416) 510-8966.