Background on Agreement in Principle on Canada Pension Plan Enhancement

Today, middle class Canadians are working harder than ever, but many are worried that they won’t have put away enough money for their retirement. Each year, fewer and fewer Canadians have workplace pensions to fall back on. To address this, we made a commitment to Canadians to strengthen the Canada Pension Plan (CPP) in order to help them achieve their goal of a strong, secure and stable retirement.

On June 20, 2016, Canada’s Ministers of Finance reached an historic agreement in principle to enhance the CPP. The deal will boost how much working Canadians will get from the CPP—from one-quarter of their eligible earnings, to fully one-third, with an increase to the earnings limit. Simply put, there will be more money waiting for Canadians when they retire. We will phase these changes in slowly over 7 years—from 2019 to 2025—so that the impact is small and gradual.

The enhancement will have the following design features:

  • The income replacement level will be increased to one-third of income.
  • The upper earnings limit will be targeted at $82,700 upon full implementation in 2025.
  • There will be a gradual 7-year phase-in beginning on January 1, 2019 consisting of:
    • A 5-year contribution rate phase-in below the Yearly Maximum Pensionable Earnings (YMPE), followed by
    • A 2-year phase-in of the upper earnings limit.
  • An increase to the Working Income Tax Benefit to help low-income earners.
  • Tax deductibility for the enhanced portion of employee CPP contributions.

This document provides further information on this agreement.

Enhanced CPP Benefits

All working Canadians will benefit from an enhancement of the CPP. This enhancement will increase income replacement from one-quarter to one-third of pensionable earnings. In addition, the maximum amount of earnings subject to CPP will be increased by 14%, which is projected to be equal to roughly $82,700 in 2025.

As the CPP enhancement will be fully funded, each year of contributing to the enhanced CPP will allow workers to accrue partial additional benefits. In general, full enhanced CPP benefits will be available after about 40 years of making contributions. Partial benefits will be available sooner and will be based on years of contributions.

This two-step phase-in is shown in Chart 1 and illustrative examples of additional CPP benefits are presented in Chart 2.

Chart 1
Main Design Parameters of Enhanced CPP
Chart 1: Main Design Parameters of Enhanced CPP

 

Chart 2
Illustration of Additional Annual CPP Benefits for Different Age Cohorts and Income Levels
In $2016
Chart 2: Illustration of Additional Annual CPP Benefits for Different Age Cohorts and Income Levels
Note: This illustration assumes that individuals have constant earnings and that individuals would take-up CPP benefits at age 65. The increase in benefits is based on contributions starting in 2025 (when enhancement is fully implemented); rounded to nearest $10.

CPP Contributions

To ensure that Canadians and the businesses they work for can adjust to these changes, the CPP enhancement will be introduced through a 7-year gradual phase-in starting on January 1, 2019. The higher contribution rate on earnings below the YMPE ($54,900 in 2016) will be phased-in over the first 5 years. In 2023, the CPP contribution rate is estimated by the Department of Finance Canada to be 1 percentage point higher for both employers and employees on earnings up to the YMPE. Beginning in 2024, a separate contribution rate (expected to be 4% each for employers and employees) will be implemented for earnings above the then prevailing YMPE. The upper earnings limit will be extended over a 2-year period and is expected to reach $82,700 in 2025. Table 1 outlines the phase-in schedule for enhanced CPP contributions. To note, the contribution rate will be confirmed through an independent actuarial assessment, which will be performed by the Office of the Chief Actuary. Table 2 outlines the change in contributions, at various earnings levels.

Table 1
Contribution Rate Phase-in
Upper earnings limit phase-in Estimated combined employee/employer contribution rate


Year Projected YMPE Projected upper earnings limit Upper earnings limit as share of YMPE Below YMPE % of max Below YMPE Rate Above YMPE % of max Above YMPE Rate
2018 $58,000 $58,000 100% 0% 0% 0% 0%
2019 $59,700 $59,700 100% 15% 0.30% 0% 0%
2020 $61,500 $61,500 100% 30% 0.60% 0% 0%
2021 $63,500 $63,500 100% 50% 1.00% 0% 0%
2022 $65,600 $65,600 100% 75% 1.50% 0% 0%
2023 $67,800 $67,800 100% 100% 2.00% 0% 0%
2024 $70,100 $74,900 107% 100% 2.00% 100% 8.00%
2025 $72,500 $82,700 114% 100% 2.00% 100% 8.00%
Note: Contribution rate estimated by the Department of Finance Canada. Requires confirmation from the Office of the Chief Actuary and is subject to secondary design decisions.
Table 2
Additional contributions
Estimated annual combined employee/employer contributions
(nominal; rounded to nearest $10; pre-tax)
Estimated bi-weekly employee contributions
(nominal; pre-tax)
Estimated bi-weekly employee contributions
 (nominal; after-tax, based on Ontario tax rates)



Year Earning
$27,450
(half 2016 YMPE)
Earning
$54,900
(2016 YMPE)
Earning
Maximum
Earnins
$27,450
(half 2016 YMPE)
Earning
$54,900
(2016 YMPE)
Earning
Maximum
Earning
$27,450
(half 2016 YMPE)
Earning
$54,900
(2016 YMPE)
Earning
$85,000
2018 $0 $0 $0 $0 $0 $0 $0 $0 $0
2019 $70 $150 $170 $1 $3 $3 $1 $2 $2
2020 $140 $310 $350 $3 $6 $7 $2 $4 $4
2021 $240 $510 $600 $5 $10 $12 $4 $7 $8
2022 $360 $770 $930 $7 $15 $18 $6 $10 $12
2023 $480 $1,030 $1,290 $9 $20 $25 $7 $14 $16
2024 $480 $1,030 $1,720 $9 $20 $33 $7 $14 $22
2025 $480 $1,030 $2,200 $9 $20 $42 $7 $14 $28
Note: Contribution rate estimated by the Department of Finance Canada. Requires confirmation from the Office of the Chief Actuary and is subject to secondary design decisions.
Assumes constant nominal earnings and based on 2016 tax brackets.
 

Working Income Tax Benefit

The federal Working Income Tax Benefit is a refundable tax credit that supplements the earnings of low-income workers. More information on the Working Income Tax Benefit is available on the Canada Revenue Agency’s website.

The Government of Canada will enhance the Working Income Tax Benefit to offset the incremental CPP contributions of eligible low-income workers. It is expected that additional annual spending of $250 million will achieve this objective (based on the full implementation of the higher contribution rate on earnings below the YMPE).

In recognition of the important role played by provinces and territories in providing basic income support, the Government of Canada has allowed them to make province-specific changes to the design of the Benefit to better harmonize with their own programs. As such, the Government of Canada will be consulting with provinces and territories before implementing the final design of the enhanced Working Income Tax Benefit to coincide with the introduction of the enhanced CPP.

Tax Deductibility for the Employee Portion of CPP Contributions

Employee Contributions

Employee contributions to the enhanced portion of the CPP will be deductible. A tax credit will continue to apply to existing employee CPP contributions.

Providing a tax deduction for employee contributions associated with the enhanced portion of CPP will avoid increasing the after-tax cost of saving for Canadians.

For example, it will mean that Canadians in pension plans that reduce employee pension contributions—which are deductible—in response to the increase in employee CPP contributions would not experience an increase in tax as a result of replacing a dollar of Registered Pension Plan contributions with a dollar of CPP contributions.

Employer Contributions

Employer contributions to the enhanced portion of the CPP will be deductible, as are existing employer CPP contributions.

Contributions by Self-Employed Persons

Self-employed persons, who pay both the employee and employer share of CPP contributions, will be able to deduct both the employee and employer share of contributions to the enhanced portion of the CPP.