Is your small business ready for Canada’s new tax rules? (Part Two)
Get ready to pay more for your employees’ Canada Pension Plan contributions
By John Bleasby
The days of company-funded employee pension plans are dwindling, particularly among smaller businesses. Recognizing that more Canadians will be dependent on government pensions in their retirement, the Federal government has started the long process of increasing employer contributions to the Canada Pension Plan (CPP).
Four decades of increased employer contributions starts this month
According to a Globe and Mail report, the employee benefits will be significant, particularly for those new or recent to the work force. “Today’s CPP is designed to replace 25 per cent of your income up to a set limit. By 2065, the CPP will cover 33.3 per cent of income up to the limit,” the Globe and Mail report says. “Finance Department numbers show that the current maximum annual retirement pension of $13,610 would be worth approximately $20,750 in 2018 dollars by the time the CPP enhancement process is done – an extra $7,140 a year.”
What is the size of the employer contribution increases? First, there will be an increase at a rate of one per cent of the next five years. Then in 2024, a new, additional contribution will be required for employees earning more than the maximum pensionable income of $70,100. That premium will be calculated at a rate of four per cent on the annual income between $70,100 and the new maximum of $74,900. In 2025, that range will increase to cover those earning between $72,500 and $82,700 per year.
(For more detailed information, CLICK HERE for the Federal government website)
National business advisory and accounting firm Grant Thornton advises, “It is important for employers to both develop a strategy to deal with the upcoming changes and communicate with employees the effect these changes might have on them.”
For employers, there will be not only the additional cost of premiums but also potential additional administrative costs. “Although the additional contributions (above and beyond the 4.95 percent original CPP rate) are still deductible expenses for the employer, those additional contributions still represent an increase in costs to businesses, which is multiplied depending on the number of workers employed and their income levels,” says Grant Thornton.
If you are a business owner making CPP contributions for your employees, you are advised to consult with your tax professional to learn how your specific operation is affected.
Read the other instalments of this series…
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