CPP proposals put national pension plan on new path

Agreement includes rate hikes, new upper earnings limit and different tax treatment for some contributions

Big changes are coming to the Canada Pension Plan (CPP) between 2019 and 2025 that will affect not only employers and employees, but also payroll departments, payroll service providers and payroll software developers.
In late June, Federal Finance Minister Bill Morneau signed an agreement in principle with the finance ministers of eight provinces to enhance the 50-year-old plan. Manitoba, which did not sign the agreement originally, has since joined it. Reforms to the CPP require the approval of seven of 10 provinces representing two-thirds of Canada’s population, as well as amendments to CPP legislation and regulations.
According to the federal Department of Finance, the agreement includes the following provisions:
The plan’s income replacement level for retirement benefits would increase from one-quarter of pensionable earnings to one-third.
Between 2019 and 2023, the CPP contribution rate for earnings up to the yearly maximum pensionable earnings (YMPE) would gradually rise from 4.95 per cent to 5.95 per cent for employers and employees. 
Between 2024 and 2025, the government would implement a new contribution rate — expected to be four per cent each for employers and employees —for pensionable earnings that fall between the YMPE and a new upper earnings limit. Currently, earnings are only subject to CPP contributions up to the YMPE. 
In 2024, the Finance Department proposes to set the new upper earnings limit at 107 per cent of the YMPE, or approximately $74,900. In 2025, it would rise to 114 per cent of the YMPE or about $82,700. 
Employee contributions to the enhanced portion of the CPP would be tax-deductible, while a tax credit would continue to apply to existing employee contributions. All employer contributions would continue to be tax deductible. 
The department says all of the figures are preliminary and that the Office of the Chief Actuary must still confirm the numbers. In addition, the department states that rates and maximums could change as a result of “secondary design decisions.”
Quebec, which has its own Quebec Pension Plan (QPP), is the only province not to sign the agreement. Finance Minister Carlos Leitão says while he supports a “modest, targeted and gradual enhancement” of the CPP, he does not think the agreement does enough to help low-income earners and that the size of the contribution rate hikes could hurt Quebec’s economy. 
He adds, though, that Quebec will continue to take part in CPP discussions. Leitão also says the Quebec government plans to hold consultations into possible changes to the QPP. He has not announced a date for the consultations yet.
Reaction to the agreement has been mixed. Labour groups are generally in favour of the CPP changes. Although organizations such as the Canadian Labour Congress (CLC) say they wanted higher CPP pension benefits, they see the reforms as an important step forward.
“Even though we had asked that the CPP be doubled, we appreciate that this will be the first increase in the plan’s history, and one that will benefit all Canadians,” says CLC president Hassan Yussuff.
Some business groups say they are concerned the CPP proposals could hurt the Canadian economy. “The announced agreement to expand the CPP will basically be a form of payroll tax that, when it is in full force, will put further strain on Canada’s already struggling businesses and on the middle class,” says Perrin Beatty, president and CEO of the Canadian Chamber of Commerce.
Dan Kelly, president and CEO of the Canadian Federation of Independent Business, says small business owners will face increased pressure to freeze or cut employee pay if the CPP agreement is enacted. He wants the governments to hold consultations on the planned changes before implementing them.
(The British Columbia government has since announced consultations for that province.)
Others see it as a reasonable compromise. The Retail Council of Canada says while it is disappointed that the agreement does not include exemptions for employers with workplace pension plans or an increase in the $3,500 exemption threshold, the agreement is preferable to provinces creating their own pension plans, as Ontario had started to do.
The Canadian Payroll Association (CPA) says it is pleased with the agreement in principle. 
“We have been advocating for a moderately enhanced CPP for five years now ever since our National Payroll Week surveys have been showing that Canadians have not been saving for their retirement,” says Rachel De Grâce, manager, advocacy and legislative content at the CPA. 
“A mandatory, statutory deduction in a national plan (where) the infrastructure has already been established in all payroll systems is the way to go. It’s more effective and efficient to administer for the employer and it’s ultimately more efficient for the government as well,” she adds.
However, De Grâce notes that the complexity of some of the proposals are a concern for the association. “As pleased as we are with the agreement in principle, because Finance Canada has made the announcement for an enhancement that is a little bit more complex than we had hoped, we are a little bit concerned about this multi-tiered and multi-faceted treatment that Finance is proposing,” she says.
“What we have found through the 38 years of our existence is that decreased complexity actually increases compliance.”
One area of complexity that De Grâce mentions is the proposal to make contributions on the enhanced portion of the CPP tax-deductible while contributions on the unenhanced portion (i.e., the 4.95 per cent contribution) would remain a tax credit. The change will have an impact on payroll system calculations. 
“I am hoping that the CPA will be successful in advocating that the tax deduction on the enhanced contribution is reconciled on the T1, the personal income tax return (rather than through payroll), until it is fully phased-in,” she says. 
“That would save employers, payroll service providers and software developers resources from having to deal with that part of the programming.”
De Grâce adds that T1 reconciliation during the phase-in would also be more cost effective for employees and for the federal government. 
“The amount of tax deduction in 2019 and beginning years, until it is fully phased-in, represents such a small tax deduction, in our opinion, it would be far more efficient for Finance to agree that Canadians would experience this tax deduction when they file their personal tax return rather than saving a few pennies or dollars each month through payroll,” she adds.
Even if the CPA is successful in getting T1 reconciliation, De Grâce says employers will still have to deal with payroll system programming issues to implement the CPP changes.
“For example, there will be absolutely the need for a new code or a new box on the T4 because, whether it is treated at source or at the end of the year upon filing, you still need to isolate which earnings are subject to the tax deduction,” she says. “Any time that we start having to create a new box on the T4 or even a new code, that has to change the employer’s payroll matrix and that’s quite complex. It’s really the skeleton of the payroll system.”
“Together (with CRA and Finance), what I am hoping to see is that we can deal with some of this complexity, decrease it so that ultimately employers will be more compliant with their new requirements.”
Another concern is Quebec did not sign the agreement and may consider changes to the QPP that differ from the CPP. 
“We are very concerned with the impact that this will have not only in terms of payroll systems that have to service employers that have employees within Quebec and outside of Quebec, but the reality is that a lot of these employees transfer in and out (of Quebec),” says De Grâce.
“What we are planning on doing is coming up with different scenarios in terms of such transfers and we are going to be sharing these with the CRA and with Revenu Québec,” says De Grâce.
“We want a harmonized response from both agencies in terms of how must the employer calculate the CPP and the QPP, how must they observe maximum contributions and then, ultimately, how must these contributions and contributory earnings be reported on the T4 and the RL-1,” she says.
“Harmonization is really the key for obtaining greater efficiency, effectiveness and compliance,” she adds.
Once the federal government confirms more details on the proposals, De Grâce says the CPA will offer training on the CPP changes so that payroll professionals can better understand how the CPP reforms will affect them, their employer and employees.
“Not only does payroll have to become the expert in owning the updating of their payroll system to make sure that they are compliant, but they also are the primary communicators in the organization for handling questions that I am sure employees are going to have,” she adds.

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