On October 6, 2016, the federal government introduced Bill C-26, An Act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act to enhance the Canada Pension Plan (CPP).
The CPP is run jointly by both levels of government and changes require the support of seven of 10 provinces representing two-thirds of the Canadian population. Canada’s governments agreed on June 20, 2016 to enhance the CPP and all nine CPP participating provinces have now confirmed their support for the agreement concluded on June 20, 2016 in Vancouver. Quebec did not sign the agreement but will remain part of the discussion going forwards. The finance minister of Quebec further stated that they are looking into their own expansion of the Quebec Pension Plan (QPP) but not in the same vein as what is intended for the CPP. The Quebec finance minister feels the CPP goes too far, and is very expensive.
As for Ontario, the decision was made to not go forward with the Ontario Retirement Pension Plan (ORPP) in light of the CPP enhancement. A Bill to repeal the Act will be tabled in Ontario the near future.
Legal framework to give effect to the CPP Agreement in Principle
To make sure that individuals and their employers have time to adjust, increased annual CPP contributions will be phased in slowly over seven years-from 2019 to 2025-so that their impact is small and gradual. For example, an individual with earnings of $54,900 will contribute about an additional $6 a month in 2019. By the end of the seven year phase-in period, contributions for that individual would be about an additional $43 per month.
Once fully phased in, the CPP enhancement will increase CPP benefits by as much as 50 percent. The current maximum benefit is $13,110. In today’s dollar terms, the enhanced CPP represents an increase of nearly $7,000, to a maximum benefit of nearly $20,000.
If Bill 26 is enacted, upon receiving royal assent, the legislation will provide for:
- Additional contributions by employers and employees phased in over a five year period, beginning in 2019 reaching an additional contribution rate of one percent by 2023. Therefore, the CPP contribution will be raised for both employers and employees to 5.95 percent from the current 4.95 percent. This will take place over a seven-year phase-in that will begin on January 1, 2019. The first additional contribution rate is also applied on pensionable earnings up to the Year’s Maximum Pensionable Earnings (YMPE) for that year. People who are self-employed pay both shares, so their contribution rate will be two percentage points higher.
- A “second additional contribution”, will be added, and will be a new and separate amount. This will be an additional contribution on earnings above the YMPE but less than the Year’s Additional Maximum Pensionable Earnings (YAMPE). The amount of income that the four percent second contribution rate applies to is new and must be calculated separately each year. Employers and payroll professionals will have to ensure that payroll systems apply the correct base/first additional contribution rate up to YMPE, know when an employee has additional income up to YAMPE and apply the correct rate to this additional income. This second additional contribution will be phased in over a two-year period commencing in 2024, reaching a second additional contribution rate of four percent in 2025. The amount of a Year’s Additional Maximum Pensionable Earnings is:
- for 2024, 1.07 multiplied by the Year’s Maximum Pensionable Earnings for that year; and
- for 2025 and each subsequent year, 1.14 multiplied by the Year’s Maximum Pensionable Earnings for that year.
In monetary terms, the YMPE and YAMPE for 2024 and 2025 are projected to be as follows:
- for 2024, YMPE at $70,100 with YAMPE at $74,900
- for 2025, YMPE at $72,500 with YAMPE at $82,700
Therefore, the four percent second additional contribution rate that applies to both employers and employees will be applied to $4,800 of income in 2024 and $10,200 in 2025.
- A continued increase of the YMPE and YAMPE and CPP contributions as well with respect to higher income earners.
- Employer contributions to the enhanced portion of the CPP will be tax deductible, as are existing employer CPP contributions.
- Self-employed persons will be able to deduct both the employee and employer share of contributions to the enhanced portion of the CPP.
- Employees will be entitled to a tax deduction when filing their T1 personal income tax and benefit return (T1 return) for the enhanced portion of CPP contributions while maintaining their non-refundable tax credit for existing CPP contributions.
- An increase to the maximum level of pensionable earnings by 14 percent as of 2025 include increase of the retirement pension amount, the survivor’s and disability pensions and the post-retirement benefit, which are subject to the amount of additional contributions made and the number of years over which those contributions are made.
- An additional Canada Pension Plan Account within the government’s Consolidated Revenue Fund to track the contributions, expenses and payments associated with the enhancement.
The Bill also makes amendments to other Acts
Amendments to the Canada Pension Plan Investment Board Act would provide for the transfer of funds between the Investment Board and the Additional Canada Pension Plan Account. They would also provide for the preparation of financial statements in relation to amounts managed by the Investment Board in relation to the additional contributions and increased benefits.
Amendments to the Income Tax Act would increase the Working Income Tax Benefit and provide a deduction for additional employee contributions. Moreover, the federal working income tax benefit (WITB) will be increased to offset the increase in CPP contributions of eligible low-income workers. Employee contributions to the enhanced portion of the CPP will be deductible.
Employers and payroll professionals should start reviewing their payroll systems and current retirement plans to prepare for the 2019 expansion of the Canada Pension Plan, and how they will communicate the changes to employees. Most employees will have to contribute more toward the CPP and will eventually see a decrease in their take-home pay. They may also want to change their contribution to their employer provided private pension plans.