Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services.

Happy retirement, here it comes …

Tax Tips & Pits with Ron Clarke, Trail Times contributor

Several months of paycheques into 2019 now and have you noticed anything different to your net take-home pay?

Likely not, so don’t panic.

Then again, it may be important to know that starting this year and over the next 5 years, Canada Pension Plan (CPP) premium contributions deducted from your paycheque and remitted to CPP on your behalf by your employer will rise.

The current contribution rate is 4.95% of your pay and this will increase by a total of 1% to 5.95% in 2023.

Speaking of employers, their matching contribution to each employee will also increase by the 1%.

This is part of the government’s announced enhancement to the CPP.

Currently the program is designed to self sustain itself with employee and matching employer contributions such that at age 65 the CPP paid benefit to you should reflect about one quarter of your life time average weekly earnings, assuming you worked and paid into it for about 40 years.

The government’s goal is to increase the current benefit paid of about one quarter of your weekly average working income, to one third of your weekly average working income. May not sound like much, but that is a 33% increase in the CPP benefit pay upon retirement.

To be clear, this will not all be accomplished simply by increasing the contribution rate by 1%. The maximum CPP pensionable earnings will be aggressively increased over the next seven years from the current $56,000 to $70,000, a $14,000 increase.

To put this in perspective, it has taken about 15 years to achieve the last $14,000 increase in the maximum pensionable earnings from $42,000 to $56,000.

This means that when the changes are fully in place in 2025, 5.95% of up to a maximum of $70,000 in annual earnings will be subject to CPP premium contribution. That’s about $4,000 deducted and remitted annually.

For those earning less than $70,000, the 5.95% will be applied to the lower earnings.

And of course, the employer will be matching the amount. And yes, the self-employed person pays both portions, because after all, they are both employee and employer.

The full impact of this change won’t be felt for about 40 years, when today’s newly entering workforce of young Canadians retires in about 2060.

Nonetheless, those who still have 20 plus years left of paying into CPP, will see some significant benefit for sure.

Finally, since it’s tax season, a reminder that for employees, the CPP premium contributions deducted from your pay are reported on your T4 and provide a 15% deduction from personal taxes payable.

For employers, the matching CPP premium contributions you make on behalf of your employees, is a payroll expense deduction that reduces business income, therefore reducing business tax.

And if you are self-employed, you guessed it, you get to use both as deductions.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.

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