The Canada Pension Plan (“CPP”) are government payments representing a replacement of income where disability, retirement, or death are involved. It is also one of the three levels of Canada’s retirement income system. CPP is responsible for paying retirement funds and disability benefits. Established in 1966, the CPP aims to provide basic benefits for retirees and individuals with disabilities who contribute to the plan. If the recipient dies, their surviving family members can receive the plan’s benefits.
Contributing to the Canada Pension Plan
CPP is a similar concept to the U.S. Social Security program. Residents of Canada, other than those in Quebec, contribute and receive the CPP. If one is receiving CPP benefits, they will receive monthly amounts that are designed to replace approximately 25% of the contributor’s earnings on which initial contributions were based. Several rules govern the amount a person can receive upon their retirement, or if they have a disability. The amount is based on the Consumer Price Index and is based on the person’s age and how much they contributed to CPP while they worked. Unfortunately, CPP benefits are considered taxable income by the Canada Revenue Agency (the “CRA”).
The Canada Revenue Agency announced in late 2017 that the maximum pensionable earnings under the CPP for 2018 increased to $55,900, up from $55,300. As a result, the maximum employee CPP contribution for 2018 will increase to $2,593.80, up from $2,564.10. Additionally, the maximum self-employed contribution raised to $5,187.60.
The CRA announced in late 2018 that the maximum pensionable earnings under the CPP for 2019 would be increasing to $57,400, up from $55,900. As a result, the maximum employee CPP contribution for 2019 will increase to $2,748.90, up from $2,593.80. Additionally, the maximum self-employed contribution raised to $5,497.80.
The employee and employer contribution rates will rise to 5.1% in 2019, versus 4.95% in 2018, and the self-employed contribution rates are increasing to 10.2% in 2019, versus 9.9% in 2018. These increases in contribution rate were implemented on January 1, 2019.
When planning for retirement, it is essential to understand how much you have made in contributions over the years because that directly impacts the maximum CPP you will receive when retired. The best way to determine how much CPP a taxpayer qualifies for is to get their CPP Statement of Contributions. To do so, you simply call Service Canada at 1-800-277-9914 and request a CPP Statement of Contributions. Service Canada will then provide you with access to your online copy.
As mentioned above, your contributions directly relate to how much you will receive in CPP benefits once retired. Eligibility to obtain the maximum CPP benefit is based on two criteria, one being the contributions and the other being the amount of contributions.
The first criteria being that a taxpayer must contribute into CPP for at least 83% of the time that they are eligible to contribute. For the typical taxpayer, this means they can contribute to CPP from 18 to 65, which is 47 years. 83% of 47 years is 39 years. Therefore, to get the full maximum benefits from the CPP program, a taxpayer will need to contribute into the CPP for 39 years.
The second criteria being that a taxpayer adds to their benefit for every year they work and contribute to the CPP between the ages of 18 and 65. On top of just working and contributing, the taxpayer must contribute the prescribed amount in each of those years. The CPP uses the Yearly Maximum Pensionable Earnings (YMPE) chart to determine whether the taxpayer contributed enough. To review the amounts in previous years, please click here.
Essentially, you need to make a certain amount of money to be able to contribute enough to the CPP to qualify for the maximum payout when retired. For example, in 2019 a taxpayer has to make at least $57,400 of income to be eligible for maximum contributions. As an aside, once you make your full contributions for the year, you will notice your pay cheques increase in amounts. This is because you have paid the maximum amount of CPP into the program for that year; thus you are no longer deducted for that year.
Have questions about your CPP benefits, or not receiving them as you should be? Give us a call today. We would be happy to discuss your options and ensure that you receive your proper pension amount from the Canada Revenue Agency.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.