Employers, payroll professionals need to prepare for Bill C-26
Now that the federal government has tabled legislation to amend the Canada Pension Plan (CPP), the countdown is on for employers and payroll professionals to get ready for the changes.
The government introduced Bill C-26, An Act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board and the Income Tax Act, for first reading in the House of Commons on Oct. 6.
The bill would implement an agreement in principle that federal Finance Minister Bill Morneau and the finance ministers of nine provinces signed over the summer to change the way the CPP operates.
Quebec was the only province not to sign the agreement. It plans to hold its own consultations on possible changes to the Quebec Pension Plan.
Morneau has called the agreement an historic one that will provide more income security for Canadians in retirement.
The proposed changes would be among the most significant amendments to the plan since it came into effect in 1966.
They would include the following proposals:
• The federal government would raise the CPP contribution rate for employers and employees on earnings up to the yearly maximum pensionable earnings (YMPE). It would phase in the change between 2019 and 2023, with the rate eventually rising to one percentage point more than it is now (4.95 per cent).
• Beginning in 2024, the government would implement a new contribution rate of four per cent each for employers and employees for pensionable earnings between the YMPE and a new upper earnings limit. In 2024, the new upper earnings limit would be set at 1.07 times the YMPE for that year. For 2025 and later years, the limit would rise to 1.14 times the YMPE for the applicable year.
• The government would set up a separate Additional Canada Pension Plan Account for the new contributions.
• The government would raise the plan’s income replacement level for retirement pensions from one-quarter of pensionable earnings to one-third. It would also increase the amount the plan pays for survivor’s pensions and disability pensions, subject to the amount of additional contributions an individual makes and the number of years over which he or she makes the contributions.
The bill would also introduce new terminology to the CPP with which employers and payroll professionals would need to become familiar, including:
• Base contribution: The original 4.95 per cent contribution that employees and employers make on earnings up to the YMPE.
• First additional contribution rate: The new contribution rate that the government would phase in beginning in 2019 for earnings up to the YMPE.
• Second additional contribution rate: The new contribution rate that would apply to earnings that fall between the YMPE and the new upper earnings limit, beginning in 2024.
• Year’s additional maximum pensionable earnings: The new upper earnings limit for the second additional contribution, beginning in 2024.
The bill also proposes to make the new CPP contributions tax deductible for employees.
Currently, employees receive a tax credit for CPP contributions. With the proposed changes, the tax credit would continue to apply to the base contribution; however, the first and second additional contributions would be tax deductible.
“Employees will be entitled to a tax deduction when filing their T1 personal income tax and benefit return (T1 return) for the enhanced portion of CPP contributions while maintaining their non-refundable tax credit for existing CPP contributions,” the CRA states on its website.
The federal Department of Finance says the tax deduction will help Canadians avoid tax increases if they change the way they save for retirement because of increased CPP contributions.
“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,” the department states.
For employers, the additional CPP contributions would be tax deductible, as are current employer CPP contributions.
Before the federal government can begin to implement the changes, Parliament has to pass Bill C-26 and the government has to revise some of its CPP regulations.
Given that the governing Liberals hold a majority in the House of Commons, the bill is expected to pass, although House support for it is unlikely to be unanimous.
During discussion of the bill in Parliament, members of the Official Opposition Conservative Party criticized the proposed CPP changes, saying they will increase the payroll tax burden on employers and hurt the economy.
“With this increase in costs imposed on them by the government, (employers) will have to find other areas to cut back. One way would be to freeze or even cut wages so that the employers’ tax burden does not increase,” said Edmonton MP Ziad Aboultaif.
“The alternative is that they will freeze hiring or even lay off employees,” he added.
However, the Finance Department says the agreement gives employers and employees a number of years to prepare for increases to CPP contribution rates.
“In its entirety we talk about seven years, but the reality is that there is a two-year notification stage plus a seven-year gradual phase-in,” said Glenn Purves, general director, federal-provincial relations and social policy branch with the Department of Finance, while appearing before a House of Commons finance committee in September.
“We are at 2016 right now and it’s going to be fully phased in by 2025, so that’s close to a decade. Without speaking for the minister who, with his colleagues, agreed to this in June, something in that order of magnitude was viewed as something that would allow Canadian businesses as well as individuals to prepare for an increase in costs,” he said.
“Having that gradual phase-in was viewed as allowing for industry and individuals to be able to absorb the modest contribution process,” added Purves.
Despite the wide-ranging amendments proposed in Bill C-26, not all payroll-related aspects of the CPP would change.
For instance, the CRA says employers would not have to carry out a separate calculation for the new CPP contributions.
“Employers will continue to withhold enhanced CPP contributions from their employees’ remuneration and pay their share of these contributions as they currently do for existing CPP contributions using Payroll Deductions Tables,” it states.
Once Parliament passes Bill C-26 and the government releases regulatory amendments, employers and payroll professionals will have more specifics on what they will need to do to get ready for the CPP changes.
In the meantime, it may be a good idea to start planning for changes to payroll systems to incorporate the new CPP rates and upper earnings limit.
In addition, employers who offer RPPs may need to take a look at their plan’s design to determine if they want to make any changes in response to an increase in CPP contributions and benefits.