Are you 65, working and still contributing to Canada Pension Plan (CPP)? You don’t have to. The rules for contributing to Canada Pension Plan changed in 2012 and the changes are significant.
ELECT NOT TO MAKE CPP CONTRIBUTIONS?
Starting in 2012, if you are between the ages of 65 and 70 and are still working, you can elect to not make Canada Pension Plan contributions. This means less source deductions taken off your pay cheque, as much as $2,356 for 2013. The benefits of not contributing to Canada Pension Plan could be even greater if you are between 65 and 70 and self-employed because you have to pay both the employer and employee contributions. This amounts to approximately $4,712. These are not small numbers!
FILE A CPT30 FORM
How do you do this? All you need to do is file Form CPT30 “Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election”. This form is available on Canada Revenue Agency’s website. Once the form is filed with Canada Revenue Agency, all you need to do is provide a copy of the filed election to any current or future employer and they will no longer deduct Canada Pension Plan contributions from your pay cheque.
Why would I do this, don’t I want to maximize my pension benefits? Any contributions that are made in the 65-70 years old period are applied to a Post Retirement Benefit, which is added to your CPP payments. However, the benefit you get for the contribution is not great. For example, if you born in 1950, make $52,500, you will be required to pay approximately $2,400 in CPP contributions. This will entitle you to a Post Retirement Benefit of $263 a year. It will take you nine years to get back your original contribution. If you do this two years in a row, it will take you 18 years etc. It may make better sense to invest that money yourself so you can get some kind of investment return right away.
There is another planning opportunity that exists if you own a company and have been paying yourself a salary. The CPP rules allow for non-contribution to the pension plan for up to 15% of your working years without affecting your CPP pension payments when you retire. Starting in 2012, the allowable non-contributory years is increased to 16% and then rising .5% each year until it is 17% in 2014. You may want to consider changing to paying yourself dividends instead of salary from your corporation if you have already contributed to CPP for most of your working years. CPP contributions are not payable on dividend payments. You do not have to remit the employee and employer portion, once again approximately $4,712, and your CPP pension will not be negatively impacted. Analysis will need to be done to each individual’s situation but often it makes sense to avoid making CPP contributions between the ages of 55 and 65 if you have been working for approximately 40 years.
At White Kennedy we are always thinking of ways to help you prosper. Please contact us if we can assist you with CPP planning or any other business issue.
Written by Peter MacIntosh – Partner, White Kennedy