Managing CPP Contributions

If you are self employed and over 60 or so, you may want to assess the economic benefit of the Canada Pension Plan.

It provides a pension of 25% of the average of wages as determined by their legislated formula and some other benefits.  So far not a big problem.  What is a problem, is that it is quite possible to contribute to the plan in such a way as to provide no extra benefit.

Here’s why you need to think about it if you are self-employed through a corporation.

For 2016, the maximum income subject to the contribution requirement will be $54,900 and the cost total for employee and employer together will be $4,959.90.

The benefit formula allows you to drop out 15% of the years in your earnings period.  (Normally age 18 to 64 – 47 years)  The maximum dropout is 7 years, and usually picks up early years in your career. That leaves 40 that you care about.  The pension calculation is a ratio of your contributions to the maximum for the years still being counted and then applied to the maximum pension.

Suppose you are 62 and already have 40 years at maximum.  Future contributions will cost nearly $5,000 annually and will add exactly zero to your pension.  You might want to consider exchanging salary for some other form of remuneration, possibly dividends that is not subject to CPP.

Of course, no tax plan is so simple that there are no side effects.

One to consider is that by taking no salary you have no Registered Retirement Savings Plan contribution room.  For older people that is not as serious as it first seems.  The net present value of the tax deduction and deferred income is not huge.

Another to notice is how the CPP disability formula works.  It is a monthly  lump sum plus a share of your retirement benefit.  If you have not contributed to the CPP in the previous three years, you will miss out on the lump sum part.

While the idea of this is straightforward, the CPP is complex.  Begin by getting your current earnings statement from them and see if there is a likelihood of paying for something from which there is no benefit.  Start here for a non-intuitive quest.

Once you have the statement you can build, or have built,  a spreadsheet to help you see the potential value of changing the form of your income.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.


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