CPP Contributions on the Rise Starting in 2019 | KPMG | GLOBAL

CPP Contributions on the Rise Starting in 2019

CPP Contributions on the Rise Starting in 2019

Bill C-26, which proposes to enhance the CPP, received first reading on October 6, 2016.

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Under this bill, by 2023 the CPP contribution rate will be 1% higher (from 4.95% to 5.95%) for both employers and employees (2% higher for the self-employed). As well, a new additional contribution rate of 4% for both employers and employees (8% for the self-employed) will apply on earnings between the yearly maximum pensionable earnings (YMPE) and a new upper-earnings limit.

Bill C-26 also contains related amendments to the Income Tax Act to increase the Working Income Tax Benefit, and to provide a deduction for the additional employee CPP contributions.

In an October 6, 2016 news release, Finance stated that Bill C-26 implements the enhancements to the CPP which federal and provincial government leaders agreed to in principle on June 20, 2016 (the June 2016 CPP agreement). Earlier, Finance stated that all nine CPP participating provinces have confirmed their support for the June 2016 CPP agreement. Following the June 2016 CPP agreement, Ontario halted all spending and work on its own proposed enhanced pension plan (the Ontario Retirement Pension Plan).

Enhanced CPP benefits
According to Finance and CRA news releases and backgrounders regarding the CPP enhancements, the enhancements:

  • Increase the share of eligible earnings received during retirement from one-quarter to one-third
  • Increase the upper earnings limit by 14% (projected to be $82,700 in 2025), and
  • Enhance the CPP disability and survivor benefits.

Finance states that the enhanced CPP benefits will accumulate gradually as individuals pay into the enhanced CPP. According to finance, the maximum benefit will be nearly $20,000 in today's dollars once fully in place (up from the current maximum benefit of $13,110).

Additional CPP contributions
Bill C-26 increases employee, employer and self-employed CPP contributions in order to fund the CPP enhancements. These additional CPP contributions are phased in over 2019 - 2024.

Based on a preliminary review of Bill C-26, current CPP contributions are replaced with three levels of CPP contributions which can, very generally, be described as follows:

  • The base CPP contribution: The existing contribution rate (4.95% for employees and employers, and 9.9% for self-employed persons) is multiplied by the employee's remuneration for the year (less a basic exemption) up to the YMPE. This is basically the existing CPP contribution
  • A first additional CPP contribution: For 2019 and subsequent years, an amount equal to the first additional contribution rate for the year for employees, employers or self-employed, as the case may be, multiplied by the earnings for the year up to the YMPE (less a basic exemption)
  • A second additional CPP contribution: For 2024 and subsequent years this is an amount equal to the second additional contribution rate for the year for employees, employers or self-employed, as the case may be, multiplied by the amount of earnings for the year up to the upper earnings limit that exceed the YMPE for the year.

Bill C-26 provides a schedule (Schedule 2) to the Canada Pension Plan Act, which contains the first additional contribution rates and the second additional contribution rates. Finance has indicated that these contribution rates are still to be confirmed, following an actuarial assessment. The estimated rates are:

Income tax consequences of additional CPP contributions
In the June 2016 CPP agreement, the federal and provincial governments agreed to provide a tax deduction (instead of a tax credit) for the enhanced employee CPP contributions. In a related backgrounder, Finance explained that as a result of the agreement:

  • An employee's enhanced CPP contributions (i.e., the first additional contributions and the second additional contributions of an employee) are to be tax deductible, whereas tax credits will continue to apply to the employee base contributions 
  • An employer's enhanced CPP contributions will be deductible from income for tax purposes (as are existing employer CPP contributions)
  • A self-employed person who pays both the employee and employer share of CPP contributions, will be able to deduct both the employee and employer share of enhanced CPP contributions.

Bill C-26 contains legislation to implement the above tax deductions.

In the June 2016 CPP agreement, the federal and provincial governments also agreed to enhance the federal Working Income Tax Benefit, which they said would help offset the impact of increased contributions on low-income workers. Bill C-26 contains legislation to implement the enhanced federal Working Income Tax Benefit.

For more information, contact your KPMG adviser.

Information is current to October 18, 2016. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

© 2017 KPMG LLP, a Canada limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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