On October 6, 2016 the government introduced Bill C-26, which sets out amendments to enhance the Canada Pension Plan. This follows the recent announcement by British Columbia that they would support the enhancement, along with the other provinces (other than Quebec, which will continue to operate its own plan, the Quebec Pension Plan). Under the CPP Act, fundamental changes, such as changes to benefits, must have the support of 2/3 of the provinces representing 2/3 of the population. With B.C. coming on board, there was sufficient support under the Canada Pension Plan Act to proceed with changes to the CPP.
The proposed CPP enhancements are an important undertaking by the federal and provincial governments. While there were significant reforms to the CPP contribution levels in the 1990s to put the CPP on a stronger financial footing and there have been some minor modifications to the methodology in calculating the CPP benefits, this is the first major reform to the CPP benefit levels since the establishment of CPP in 1966.
The CPP is considered one of the 3 pillars of retirement savings in Canada – along with the Government funded pillar of OAS/GIS and the privately funded pillar of voluntary tax-assisted retirement savings, such as workplace pensions and RRSPs. Employers, employees and the self-employed all contribute to the CPP. Under the current regime, the contribution rate is 9.9%, shared between the employer and the employee (on earnings above $3,500 up to the Years’ Maximum Pensionable Earnings (YMPE), which is $54,900 for 2016). The CPP currently is designed to replace 25% of income up to the YMPE for a person who contributes the maximum amount to the CPP each year for approximately 40 years.
The CPP has been an important supplement for Canadians’ retirement security for many years in Canada. As you will recall, the prior federal government refused to consider CPP enhancement, which led to the Ontario government proposing to introduce its own supplemental plan – the Ontario Retirement Pension Plan (ORPP) – for people employed in Ontario. The new federal government has made it clear that CPP enhancement is a priority and reached an agreement in principle with the provinces at the June 20th Finance Ministers Meeting. Following that announcement, Ontario indicated that it would not proceed with the ORPP, as a national solution had always been the preferred course.
The Department of Finance released a Backgrounder, which explains in detail the proposed changes. The backgrounder provides further detail on the agreement in principle that has been reached among the provinces and federal government with regard to CPP enhancement. The intent is that these new enhanced benefits will be phased in and funded such that young Canadians who are just starting to work will recognize the most significant increase in benefits.
CPP contributions will increase over 7 years, commencing in 2019. The contribution increases will involve a “first additional contribution”, which is an additional contribution on eligible earnings below the YMPE. This first additional contribution will be phased in over a 5 year period, starting in 2019 reaching an additional contribution rate of 1% by 2023. There is also a “second additional contribution”, which is an additional contribution on earnings above the YMPE but less than the Years Additional Maximum Pensionable Earnings (YAMPE). This second additional contribution will be phased in over a 2 year period commencing in 2024 reaching a second additional contribution rate of 4% in 2025. Because these contributions are intended to fund the CPP enhancement, these rates could change if an actuarial review indicates that the contributions are not sufficient to fund the enhanced portion of the CPP benefit.
Currently employees receive a tax credit for the contributions they make to CPP. This tax treatment will not change for the base contribution. However, for the additional contributions to CPP, employees will be entitled to a tax deduction instead of tax credit. This is intended to ensure that the impact of the additional CPP contributions is tax neutral for employees who reduce contributions to RRSPs or whose contributions to pension plans are reduced by an amount to correspond with the additional CPP contributions. For employers, all CPP contributions will continue to be deductible.
The enhanced CPP benefit will be comprised of an additional CPP benefit referable to the first additional contribution and a further additional CPP benefit referable to the second additional contribution. Those additional contributions will be accounted for separately from the current contributions to the CPP. The ultimate impact of these changes will be that for earnings up to the YMPE, the maximum CPP benefit will increase from 25% of earnings to 1/3 of earnings. In addition, from 2025 and thereafter, the upper earnings limit on which a CPP benefit will be determined (the YAMPE), will be 14% higher than the YMPE in the applicable year. Upon full implementation in 2025, the upper earnings limit is expected to be about $82,700.
Given the speed at which the federal government moved to introduce legislation to implement these changes following B.C.’s agreement on CPP enhancement, this is strong signal of the continued importance of CPP enhancement to the federal government. This importance reflects the sentiment among many Canadians that CPP enhancement is desirable. As the federal government moves forward with this important initiative, private plan sponsors should be evaluating their pension plans now to determine whether any changes are needed for CPP integration purposes.