DFK Tax Newsletter
What’s New with the Canada Pension Plan (CPP) Enhancements
The Government of Canada implemented the “CPP Enhancement” effective January 1, 2019. One of the main focuses of the CPP Enhancement is to provide greater financial stability later in life, but it requires an increase to current premiums for both employees and employers as well as self-employed persons.
The CPP Enhancement has been structured as a top up to the existing CPP and not an additional benefit.
The CPP now consists of:
- the base (original CPP)
- first additional component phased in between 2019 and 2023
- second additional component phased in between 2024 and 2025
First Additional Component 2019 – 2023
The first additional component was a contribution rate increase for employees, employers and self-employed individuals. The contribution rate increase was phased in from 4.95% of earnings over $3,500 up to the Maximum Pensionable Earnings amount in 2018; to 5.95% in 2023 (2019 – 5.10%, 2020 – 5.25%, 2021 – 5.45%, 2022 – 5.70%) for employees and employers.
The rate was increased from 9.90% to 11.90% for individuals who are self-employed. This rate increase plus the annual increase to the yearly Maximum Pensionable Earnings increased the annual maximum CPP premiums for sole proprietors from $5,187.60 in 2018 to $7,508.90 in 2023.
Second Additional Component 2024 – 2025 – CPP2
Starting in January 2024, the last phase of the CPP Enhancement was implemented. In this phase, a new limit has been introduced called the Additional Maximum Pensionable Earnings amount. This is a new limit put on top of the existing Maximum Pension Earnings, to create two different ranges of CPP. The new second tier will have a contribution rate of 4% for employees and employers, or 8% for self-employed individuals.
For 2024, the Maximum Pension Earnings will be $68,500 and the Additional Maximum Pensionable Earnings amount is set at $73,200. This new limit represents a 7% increase over the regular Maximum Pensionable Earnings. For 2025, the Additional Maximum Pensionable Earnings amount will be 14% of the regular Maximum Pensionable Earnings.
See below an example of an employee who has an annual salary of $90,000:
|
|
2023 |
2024 |
2025* |
|---|---|---|---|
|
Annual Salary |
$90,000 |
$90,000 |
$90,000 |
|
Maximum Pensionable Earnings |
$66,600 |
$68,500 |
$71,200 |
|
Additional Maximum Pensionable Earnings |
N/A |
$73,200 |
$81,100 |
|
CPP Base Rate – 5.95% |
$3,754.45 |
$3,867.50 |
$4,028.15 |
|
CPP2 – 4% |
N/A |
$188.00 |
$396.00 |
|
Total Annual Cost to each Employer and Employee |
$3,754.45 |
$4,055.50 |
$4,424.15 |
* Projected figures
From the table above, employers and employees can both expect to pay an additional amount of $188 for 2024, and $396 for 2025 and onwards for employees who earn income above the new Additional Maximum Pensionable Earnings amount. Self-employed individuals will pay $376 and $792. Both the Maximum Pensionable Earnings and the Additional Maximum Pensionable Earnings are indexed into the future.
Tax Implications
Employees will continue to receive a non-refundable income tax credit on their base CPP premium but will receive a tax deduction for the premium paid on the two CPP additional components when filing their personal tax return. All employer contributions continue to be deductible as a business expense.
The immediate cash flow cost of the additional premiums will be another consideration for owner managers deciding on their own remuneration mix as to dividends versus salary.
