By Sheryl Smolkin
Well, the earth moved and in late June at a meeting of provincial/federal finance ministers, Bill Morneau got the consensus he needed from eight provinces including Saskatchewan for the phase in of modest enhancements to the Canada Pension Plan. As a result Ontario has agreed to shelve its plans for a home-grown Ontario Registered Pension Plan.
The feds plan to start collecting higher premiums beginning January 1, 2019. Many details still have to be ironed out, but here are 10 things you need to know about how enhanced CPP benefits will impact both employers and employees.
- The Canada Pension Plan Act says that once a sufficient number of provincial governments have indicated support, the federal government can move forward and lock in the reform with an Order in Council—no new Parliamentary debate or legislation is required. From that point forward, the expansion will be fixed in place unless amended through a subsequent agreement of two-thirds of provinces to reverse the expansion—which is very unlikely.
- If you are already retired or close to retirement you will not benefit from the changes. Someone retiring in 2020 who made one year of the increased contribution would get a tiny amount. Someone retiring in 2030 would have 10 years of extra contributions.
- Canadians who work a full 40 years will see their benefits increase (in 2016 dollars) to a maximum of $17,478 instead of $13,000. Therefore the replacement rate will inch up from 25% of the Year’s Maximum Pensionable Earnings (YMPE) to one-third.
- The maximum amount of income subject to CPP will increase 14% from $54,900 this year to $82,700.
- Increased premiums of one percent will be phased in over seven years beginning in 2019. That means depending on the income levels of individual Canadians, up to $408 will come off their pay cheques.
- The refundable tax credit known as the federal working income tax credit will be expanded to help low-income Canadians offset the increase in premiums.
- Changes will not impact RRSP (and SPP) contribution room.
- To avoid increasing the after-tax cost of the added premiums, Ottawa will provide a tax deduction for the additional contributions rather than a tax credit.
- Company pension plans are not always offered – particularly Defined Benefit plans. Therefore it makes sense that young people and mid-career employees will benefit.
- Participation is mandatory and from the limited information released to date, it appears that even companies that do have a pension plan will have to make additional contributions and their employees will not be exempt.