THE QUESTION
I'm a self-employed. How would the proposed expansion of the Canada Pension Plan affect me?
THE ANSWER
First, let's define the term self-employed and see where your business fits. Self-employed individuals include sole proprietors of their business, partners in a partnership, and incorporated individuals who are the sole employee of their corporation. Unlike regular employees who pay only the employee portion of the CPP contribution, self-employed professionals cover both the employer and employee contributions to the CPP.
Currently, combined employer and employee contributions to the CPP are 9.9 per cent of eligible earnings (4.95 per cent employer portion plus 4.95 per cent employee portion). Under the proposed CPP changes to be phased in from 2019 to 2025, contributions on both sides are expected to increase by one percentage point each, increasing the combined CPP premiums to 11.9 per cent for the self-employed.
So what does this mean for your business? You might need to reconsider the way your business is structured, or how you compensate yourself, to have some flexibility on your CPP contributions. If you are a sole proprietor, you may want to look into incorporating yourself so you can have the option to compensate yourself in the form of salary or dividends. For example, incorporated individuals can opt to pay themselves a salary lower than the earnings cap covered by CPP, and take the rest of their income as dividends, to reduce CPP premiums and employment income. Incorporated individuals can also participate in a pension plan, which could be structured to accommodate the CPP changes. Sole proprietors don't have the option to do that.
A word about the Ontario Retirement Pension Plan. Employers and employees in Ontario (including incorporated individuals) would eventually have faced combined employer and employee contributions to the ORPP of 3.8 per cent of eligible earnings (1.9 per cent employer portion plus 1.9 per cent employee portion), almost double the expected CPP increase. The CPP expansion is a welcome relief for those affected employers and employees, as it looks like the ORPP will now be abandoned. The ORPP does not cover sole proprietors, so the CPP expansion will simply be an additional cost to them.
There is a bright side, though, as the increased CPP contributions now will generate a higher CPP pension when you retire down the road.
Andrew Harrison is the national leader of the Pension and Benefits Group at Borden Ladner Gervais.