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CPP for Unincorporated Farmers


Is It Right For You?

With most unincorporated farmers, the cost of CPP makes up a large portion of their tax bill. As such, I am asked often by clients if this is worth the investment or should they be looking at other options. To help them choose, I generally provide some rough numbers:

  1. The maximum CPP contribution per year is approximately $2,500. The total cost for an unincorporated farmer is twice this ($5,000) as they need to make both employer and employee contributions.

  2. If you work from age 25 to 65, that is 40 years x $5,000 = $200,000. Using an average rate of return of 5%, that is approximately $635,000 in future value at the age of 65.

  3. Average life expectancy is approximately 79 years, so in order for CPP to breakeven for you, the annual benefit would need to be approximately $65,000 per year at age 65. (That is the annual payment discounted by 5% from age 65 to 79 that is equal to the future value as calculated above).

It’s tough to imagine that the CPP annual benefit would increase that much and the situation is even worse if you pass away before 79. However, the only consolation is that your estate receives the $2,500 death benefit. If you are married, your spouse receives only 60% of the payments you were entitled to.

If you were able to put the CPP contributions into your own savings plan, you (or your estate), would still have the $635,000 of value at your disposal even if you were to die earlier than 79.

Having some idea on the numbers now, you can choose what’s the best option for you.

For more information, contact Bruce Warkentin, CPA, CA, CBV, CPA (Illinois) Business Advisor, Taxation, at [email protected]