In 2016, the federal and provincial governments agreed to enhance the Canada Pension Plan (CPP); the plan is to increase the amount of retirement benefits Canadians will receive going forward. The hope is to raise the benefit to equal one-third of the average Canadian’s earnings, this is up from the current one-quarter percent of earnings. In order to achieve this, CPP premiums must go up. Those increases are slated to begin January 2019, and will continue to increase in small steady increments over the next few years.

 

Quick Recap of Changes:

Stage 1: Increase in Premiums (2019-2023) In 2018 both employees and employers pay premiums of 4.95% on earned income between $3500 and $55,900. Currently the income above and below these amounts are not subject to CPP contributions by either party. The threshold of $55,900 is known as the yearly maximum pensionable earnings or YMPE, and is indexed annually. Starting in 2019, the premiums will increase by 0.15% to total 5.10% for both the employee and employer. Therefore, taxpayers whose income is equal to the YMPE ($55,900) will pay about $80 more in premiums. Following that, another increase of 0.15% will be added in 2020, 0.20% in 2021 and 0.25% in 2022 and 2023. All together, the total increase will equate to 1% totalling 5.95% for both employee and employer. Thus the combined premiums will go from 9.9% to 11.9%.

 

Stage 2: New Additional Premium on Higher Income (2024-2025) Starting in 2024, there will be a new concept and calculation for higher income earners. The Yearly Additional Maximum Pensionable Earnings (YAMPE) will be calculated for income earned up to 7% over the YMPE. It will then be set to 14% over the YMPE in 2025 any beyond. The premium for earnings between the YMPE and YAMPE will be 4%, for both employees and employers.

 

In Dollars and Cents

For the purpose of this estimate, we will assume the changes have already been implemented and therefore use 2018 figures instead of trying to project 2025 threshold amounts.

*Employees would pay an extra 1% on contributory earnings ($55,900-3500) = $524

*At 14% over the YMPE, the YAMPE would be $63,726, yielding a difference of $11,326. An additional 4% premium on this amount equates to $453.

 

To calculate the increased premium, it would be easy to just add the two amounts together, however we need to incorporate taxes – which in this case is a good thing. As Ontario residents we can assume the tax credit on the base contributions (up to YMPE) will be approximately 20% bringing the $524 down to $419. On the YAMPE the employee receives a tax deduction on the additional premium. The tax rate on $63,726 is about 30%, bringing the $543 down to $317. Summing up our example, the employee will pay $736 ($419+$317) in additional premium.

 

The Self-Employed – If you are self-employed, you already know that as both employee and employer you bear cost and pay both sides of the premium.

 

Have a great weekend,

Tracey

 

 

Source: Original article posted on Advisor.ca 25-09-18 by Doug Carroll, Tax & Estate Planning Meridian Credit Union