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The Enhanced Canada Pension Plan
In 2019 the federal goverment introduced the Enhanced Canada Pension Plan.
This Enhancement starts in 2019 and gradually changes every year until 2025
The overall increases will not only increase the % of your earnings going into CPP, but it will also increase the maximum income range or YMPE (Year's Maximum Pensionable Earnings) limit by 14%
The overall cost of the enhancement can be as high as 66.8%.
OUT WITH THE OLD! Before 2019 - How it worked
Under the old system, your CPP contributions were calculated as follows:
Your income (up to the YMPE)
= Your annual maximum
And your employer is required to match this amount
in 2018 your income is $70,000 per year
The YMPE in 2018 is $55,900
Here is the calculation:
Less - $ 3,500
CPP Earnings = $52,400
CPP X 4.95%
Your Portion = $ 2,593.80
Employers Portion + $ 2,593.80 * If you are self employed, you pay this as well
Total = $5,187.60
BUT WAIT... THERE'S MORE
As they say in TV there is always more.
Starting in 2024, there will be a new High Income CPP Enhancement.
According to the proposed CPP rules, starting in 2024, the Federal Governemnt will be adding a second tier which will be 14% above the YMPE. At this level, they will take an additional 4% off your paychecks that did not exist before.
(In 2025, this is estimated to be on earnings between $69,700 and $79,400)
So, can you explain that in english? - Why of course!
As per the above example, here is what you would expect in 2025.
in 2025 your income is $80,000 per year
The YMPE in 2025 is $69,700 (7 year increase of 21.4% or apx 3.25% compounded per year)
Here is the calculation:
Tier 1 Calculation
Less - $ 3,500
CPP Earnings = $66,200
CPP X 5.95%
Your Portion = $ 3,938.90 (Increase of $1,345.10) or 1.68%
Employers Portion + $ 3,938.90 * If you are self-employed, you pay this as well
Total = $7,877.80 (Increase of $2,690.20) or 3.36% of salary
Tier 2 Calculation
Less Tier 2 Threshold - $79,400
Less YMPE - $ 69,700
Tier 2 Earnings = $ 9,700
CPP X 4.00%
Your Portion = $ 388
Employers Portion + $ 388 * If you are self-employed, you pay this as well
Total = $ 976
Total CPP Paid
Your Employer + $4,326.90
Total = $8,653.80
2018 Amount - $5,187.60
Cost of Enchancement
Your Employer + $1,733.10
Total = $3,466.20
That is a CPP Increase of 66.8%
If you read the Govenment of Canada's explanation of the enhancement, they advertise that the reason for the enhancement is to increase your CPP income by 8.33% (from 1 quarter to 1/3 of your average work earnings)
The cost of this is an increase of CPP payments of 66.8% so that every Canadian is forced to invest 11% of thier lifetime earnings into thier plan defined pension plan which does not provide you any guarantee of payment should you die before you get your money back
I would have to say Mission Accomplished!!!
*Please note that the above comments are opinions of Stacey Bartel and may or may not reflect the opinions of any other O.B.S. Financial employees, affiliates or partners*