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Upcoming Changes to the Canada Pension Plan

The Canada Pension Plan is an important source of retirement income for many Canadians, and the government has taken steps to enhance it.

The goal of the Canada Pension Plan (CPP) up until now has been to replace 25% of average work earnings in retirement, with the amount of pension received based on average work earnings over a 40 year period. A gradual enhancement will be phased in between 2019 and 2025, with the goal of replacing 33.3% of work earnings after 2019. These changes will be funded by increased contributions.

CPP contributions are shared by employees and their employers on income over a basic exemption of $3,500. They are also paid by self-employed individuals, who are responsible for the full amount of contributions.

The contribution rates for 2018 remain the same as 2017: employees and employers each pay 4.95% of earnings, up to maximum earnings of $55,900. The maximum "earnings subject to contributions" for 2018 is $52,400 ($55,900 - $3,500). Self-employed individuals pay 9.9% of net income. The required contributions are calculated on Schedule 8 of your income tax return (Form RC381 if you live in Québec or earn income there).

The contribution rates increase in 2019 to 5.10% each for employees and employers, 10.20% for the self-employed, and will grow gradually until 2023, when the rates will be 5.95% for employees/employers, 11.90% for self-employed. The maximum earnings subject to contributions will also increase each year.

A new contribution level will be introduced for 2024-25, between whatever the maximum earnings amounts are in those years, and an upper limit projected to be $82,700 less the $3,500 exemption. Additional contributions on this upper-level income will be required of 4% each for employees and employers, 8% of net income for the self-employed.

The Québec Pension Plan will be enhanced in a similar manner to CPP.

Employees generally have CPP/QPP contributions deducted from pay throughout the year by the employer (if not, they can make additional contributions), and may receive a refund on their tax return if too much was deducted. Self-employed individuals (owners of unincorporated businesses, independent contractors, those who earn professional or commission income, etc.) generally make contributions with the filing of their tax returns – the contributions are included in their total tax payable for the year.

Further Reading
Government of Canada: Canada Pension Plan Enhancement
Department of Finance: Canada Pension Plan (CPP) Enhancement
Rob Carrick: CPP Improvements Start in 2019
Wikipedia: Canada Pension Plan
Retraite Québec: Québec Pension Plan

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