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Ask an Accountant – Canadian Pension Plan (CPP)

The provincial and federal finance ministers have re-examined certain aspects of the Canada Pension Plan (CPP) reforms that were previously agreed to in late 2016. However, they will avoid a larger re-evaluation of the efficacy of an expanded CPP.

What is the CPP?

The CPP is a contributory public pension plan that provides a basic level of earnings replacement in retirement for workers throughout Canada. It is financed through your employer, employee and self-employed contributions, as well as income earned on CPP investments. The contribution rate is 9.9% of earnings between a basic exemption of $3,500 and the Year’s Maximum Pensionable Earnings.

Canada’s finance ministers have agreed on some changes to the Canada Pension Plan. Here are the five main things you should be aware of:

1) A new mechanism introduced for Canadians who take time off to raise children with disability will not see a loss in their retirement benefits. This new mechanism is set to have “drop-in” provisions set that will in turn assign a higher income for the years taken off, and will use this to calculate the retirement benefits. This “enhanced” method is based on a fixed, 40-year benefit accrual period, which makes it easier to drop-in amounts as opposed to currently where the CPP is dropping out years.

2) A new formula was established to drop-in the average income over the preceding five-year period before a parent took time to raise children under the age of seven. For those with disabled children the formula will use 70% of average earnings in the size year prior to the onset of the disability during the years out of the workforce.

3) Survivor benefits will be paid out regardless of age, dependent children or disability. Those previously denied due to age, etc. will be able to re-apply come 2019. There will be no reduction in benefits for those younger than 45. Current recipients will have their benefits increased.

4) A lump-sum payment upon a person’s death will be set for everyone at $2,500 as opposed to being based on the deceased’s earnings. This is supposed to help low-income workers.

5) The changes won’t require increases in CPP contribution rates; however, Canadians must wait until 2018 to know the actual cost to the CPP balance and its effects on benefits for recipients.


Worried how this may effect you? Contact us for all your retirement planning and financial advisory needs: info@kbh.ca