What your business needs to know about recent changes to CPP
In 2019, new Canada Pension Plan rules came into force that business owners need to consider.
The changes allow retired Canadians to receive higher CPP benefits than they do now. Currently, the CPP retirement benefit is 25 per cent of a worker’s average adjusted earnings. With the amendments, this will increase over time to 33 per cent.
Two types of contribution increases will be phased in. Starting in 2019 and ending in 2023, there is a phased-in, one-per-cent increase to the employee and employer contribution rates.
By 2023, the employee contribution percentage will be 5.95 per cent (up from 4.95 per cent), paid on earnings between $3,500 and an upper limit known as the Year’s Maximum Pensionable Earnings (YMPE). An employee earning $50,000 a year will contribute nearly $465 more annually beginning in 2023, while an employer will see a similar increase in contributions.
Also, starting in 2024, there will be an increase in the maximum amount of earnings that are subject to CPP.
The maximum will go up seven per cent in 2024 and another seven per cent in 2025, for a total increase of 14 per cent relative to the YMPE.
Employees and employers will contribute an additional four per cent on whatever they earn between the YMPE and this new upper earnings limit, which is projected to be $82,700 in 2025.
Here’s how owners can prepare for the new rules:
• Conduct detailed projections to estimate what your additional costs will be during the phase-in period and into the future. If you have a defined benefit plan for your employees and it’s integrated with the CPP system, will you need to change your benefit formulas?
• Despite having to pay more for CPP, companies should aim to keep their group RRSP or private sector pension plans; otherwise, you may lose a benefit that is helpful in attracting and retaining your workforce.
• It’s important that employees understand the changes as they will see their take-home pay drop – unless their employer decides to make up the difference. They should also understand that because the increased CPP benefits take 40 years to completely kick in, they may, depending on their age, benefit very little from the changes.
• Because calculating CPP deductions will become more complicated once the changes are in effect, even small businesses that normally handle their own payroll may want to outsource the job to a payroll company.
As a business owner you have key decisions to make that will have a profound effect on the continued financial success of your business and your own financial well-being.
Make the right decisions for your situation with the help of your professional adviser.
Jeff Somers, BA, RRC, CFP, works at Investors Group in Charlottetown. This column is written and published by IG Wealth Management as a general source of information only. It is not intended as a solicitation to buy or sell specific investments or to provide tax, legal or investment advice. Contact your own adviser for specific advice about your circumstances.