Beginning on January 1st, 2019, Canadians will begin contributing more to the Canada Pension Plan (“CPP”). This change is referred to as the CPP Enhancement and is being introduced in two phases, over the next seven years. The purpose of the Enhancement is to increase pension benefits to recipients by approximately 50% over current benefit levels.
Since 2003, Canadians have contributed 4.95% (9.9% if self-employed) of their earnings (up to an annual maximum) to the Canada Pension Plan. Beginning January 1st, 2019, that rate will increase to 5.1% and will increase each year until January 1st, 2023 when Canadians will begin paying at a rate of 5.95% (11.9% for self-employed individuals), a 20% increase over 2018 contribution levels (excluding the increase in contribution limits).
For an employee earning $45,000 per year, the employee will pay CPP premiums of $2,116.50 for the year in 2019 whereas they would have paid $2,054.25 in 2018; an increase $62.25 per year. By 2023, the same employee on the same earnings would be paying $2,469.25 per year, or $415 more than they would have paid in 2018.
The same increase applies to businesses and organizations with employees. A business with 10 employees each earning $45,000 per year will pay an additional $622.50 in 2019 and an additional $4,150 per year by 2023 before any increases in pay. This would bring the total CPP costs to $24,692.50 for that business.
Phase 2 will begin in 2024 with the introduction of a higher annual limit for higher income earners. This higher limit will be set at 7% higher than the normal 2024 annual limit and 14% higher in 2025. Canadians and businesses will pay CPP at a rate of 4% (8% if self-employed) on this higher limit. The government projects this higher limit in 2025 will be $79,400 but that will change based on increases in the average wage in Canada between now and then.
To assess the full impact of the changes, we can look at an employee earning $79,400 under 2018 rules and under 2025 rules. The annual maximum earnings in 2025 is projected to be $69,700 and an employee would have otherwise paid $3,276.90 in CPP premiums under 2018 rates. Under the Enhanced CPP, the same employee would end up paying $4,326.90 for a total increase of $1,050 per year, a 32% increase.