Skip Ribbon Commands
Skip to main content

Things Professionals Should Know About the Canada Pension Plan (CPP)

08/12/2014


If you earned more than $52,500 of wages from your medical corporation or self-employed income from an unincorporated practice, you (including your corporation) will have paid $4,851 into the CPP plan for 2014.

Would you normally pay someone or something this amount of money without understanding how the program works? To be fair, you likely haven’t thought about it much. Let’s change that.

Yes, it is a pension plan (sort of).

The Canada Pension Plan is like a pension plan because:

  • What you pay in does relate to the amounts you expect to receive in retirement
  • Amounts you contribute now reduce your current tax
  • Amounts you receive later are taxable income when you receive them
  • It is unlike a pension plan because:

  • Two people could receive the same benefit but have paid different amounts into CPP
  • The CPP portion paid by the employee / self-employed person (50% of the above) is only eligible for the lowest rate tax credit rather than a deduction against taxable income
  • The CPP benefits received are not eligible for the pension income tax credit
  • Extras provided by CPP that are not usually found in normal pension plans:

  • Limited disability benefits
  • Death benefit payment of up to $2,500
  • Maybe we need to look a little deeper - but without burdening you with the details of the 2012 CPP reform changes.

    The eligible employment period starts at age 18 and normally runs to age 65. CPP is payable on earned income, up to the annual maximum, during the eligible employment period. Normally, your eligible employment period covers 47 years of contributions. But, 47 years really doesn’t have to be 47 years. You might be eligible for the Child Rearing Drop Out, which excludes years without maximum contributions while you had young children up to seven years old. Plus, we all qualify for a “drop out” of 15% of the total eligible years, up to seven years, without maximum contributions.

    What does it all mean?

    An example…

    X has worked continuously from age 18, earning wages from employment at above the annual maximum until retirement at age 65 and starts to receive the maximum available monthly CPP benefits at that time. Now, we know 47 years ago the annual maximum was very low and so were wages.

    Y worked through her postsecondary years while getting a university degree, attended medical school, paid CPP on earnings during residency, and had a one child born during the education years. Because Y is well-informed by her accountants, Y elected to plan her personal income from age 55 to age 65 and did not contribute to CPP for five of those years. By claiming the Child Rearing Drop Out and understanding the 15% Drop Out when Y retired at age 65, the maximum available monthly CPP benefits was available.

    But what is really different here?

    Y has not paid five years of CPP contributions between age 55 and 65, will have been able to increase her personal retirement savings by the amount not paid to CPP and still will receive the full CPP benefits available.

    And Y also had a plan that allowed full access to the RRSP matching available to British Columbia physicians.

    Are you working with professional advisors that can help you be smarter in your planning for retirement?

    To learn more, contact Don Murdoch at 250.763.8919 or [email protected], or your local MNP Advisor