The new year is only a couple months away and with it comes changes that could have a large impact on businesses and individuals across the country. One of the biggest changes is the change to the Canada Pension Plan (CPP) and contributions.
Under current legislation, the maximum CPP contribution is 4.95% on Yearly Maximum Pensionable Earnings (YMPE) of $55,900 less a basic exemption of $3,500 (4.95% x ($55,900 – $3,500) = $2,593.80). This amount is paid by both the employer and employee for a total annual contribution of $5,187.60 ($2,593.80 + $2,593.80 = $5,187.60).
In October 2016, however, Bill C-26 was passed with the intention to enhance the CPP program for working Canadians so that they will receive more from CPP upon retirement, increasing from 1/4 of eligible earnings to 1/3. It is important to note that the amount received by each working Canadian will depend on how long they have contributed to the enhanced CPP and the amount which they have contributed.
To account for this increase in CPP, five major changes will be made to the CPP program, and related benefits, from now until 2025.
Starting January 2019, both employers and employees will be required to contribute a greater percentage of eligible earnings to CPP. The increase of 1% (from 4.95% to 5.95%), for both employers and employees, will occur gradually from 2019 to 2023.
In addition to an increased rate of contribution, the YMPE will increase from $55,900 in 2018 to $72,500 by 2025.
In 2024, the government will also be introducing the YAMPE, a 4% contribution rate that must be paid by both employer and employee on any amount exceeding the $72,500 YMPE up to a maximum of $82,700.
To help offset the increase in CPP contributions for low income Canadians, the Federal Working Income Tax Benefit will be increased for individual taxpayers.
Employees who are required to pay additional CPP on the YAMPE, will be entitled to a tax deduction on the excess amount. Those who are self-employed will also receive the deduction on the employer portion of the YAMPE.
These changes will have a large overall effect on business owners, as well as employees. Planning ahead will play a large role in minimizing the impact on a go-forward basis.
Firstly, you will want to ensure that you consider the future cost that will be associated with these additional source deductions and how that will reflect on your profits, future raises and any benefits packages you have in place for new and existing employees.
Communication will also be important. Not only do you have to ensure that your payroll team is ready and prepared for these changes, you will want to ensure that your employees understand the changes and what it means to them (i.e. additional source deductions, how it will affect their benefits plans, the additional cost you are incurring to contribute to their retirement, etc.).
For more information on these changes and to prepare a strategy, contact us today.