The Canada Pension Plan will launch a new level on Jan. 1 and – no surprise – it will cost Canadians more.
The CPP has been getting a lot of attention because of the Alberta government’s proposal to opt out and set up a parallel provincial plan, à la Quebec.
Based on a report commissioned by the provincial government, Alberta would take 53 per cent of CPP assets with it on departure, a figure that has dumbfounded everyone who has read it.
That won’t happen. Even if Alberta were to leave, estimates I’ve seen suggest it would only be entitled to about 20 per cent of the CPP fund.
Trudeau says Alberta’s withdrawal from CPP would weaken pensions for everyone
In short, the proposal isn’t going to fly, at least not on those terms. It seems to be a case of Premier Danielle Smith trying to mess with Justin Trudeau’s brain.
What is real is the launch of CPP2 in January. Most people are unaware that’s the date when a plan to raise coverage levels kicks in. We’ll be paying the usual increased contribution, plus a surtax for higher-income workers.
Evelyn Jacks, who has written several books on taxation and runs the Winnipeg-based Knowledge Bureau, drew my attention to these changes in a recent issue of her company’s newsletter.
It all dates back to June, 2016. A meeting of federal and provincial finance ministers that year agreed to increase benefits to cover 33 per cent of pensionable earnings, rather than the current 25 per cent. Of course, that can’t happen without raising the contribution level.
The finance ministers decided to wait eight years to complete the plan’s implementation (perhaps they figured they’d have moved on by then and someone else would be blamed). Most Canadians didn’t take notice – it was a long way off.
But now, here we are. The new regime takes effect in less than two months, at a time when inflation has many people scrambling to make ends meet.
Here’s a quick look at what’s going to happen. You can find more details here.
First, employees and businesses will have to deal with the regular annual contribution hike. For employees, the maximum annual payment will go up by 3 per cent to $3,867.50, as the pensionable income covered increases to $68,500. That amount must be matched by the employer. Self-employed people will be on the hook for the full amount of $7,735.
At this point, the new level kicks in. People earning more than $68,500 in pensionable income will be required to make additional contributions at a 4-per-cent rate on the next $4,700, to a maximum of $188. That will bring the total maximum contribution in 2024 to $4,055.50 for an eligible employee and $8,111 for someone who is self-employed.
The Knowledge Bureau estimates that CPP2 contributions in 2025 will be 4 per cent of an additional $9,700 in pensionable earnings, or an extra $388 on top of the maximum level for CPP1.
Raising benefits down the road is a desirable objective for any pension plan. But many people may be reluctant to pay higher contributions while inflation is eating away at their buying power. For a government that’s badly trailing in the polls, the timing doesn’t look great.
Follow-up: There are a few points I should add to my article last week ‘about the current offer to exchange shares in Brookfield Corp. (BN-T) for those of Brookfield Reinsurance (BNRE-T) on a one-for-one basis. The offer expires Nov. 13.
Investors who tender their shares of BN are exchanging their holdings in a global conglomerate for shares in a company with a much narrower focus, but one that maintains exposure to all the economics of BN. This is owing to the fact that shares in BNRE can be exchanged for those of BN on a one-for-one basis at any time, effectively pairing them. However, you cannot exchange BN for BNRE after the offer period.
BNRE shares pay a return of capital distribution rather than a dividend. Return of capital reduces the shareholder’s tax base, resulting in a tax deferral until the shares are sold. Unless you own a lot of shares, the tax saving is small because the quarterly payment is only US$0.07 in both cases. But this is why BNRE shares usually trade at a premium of a few cents to BN shares. Of course, the tax saving only applies if the shares are in a non-registered account.
One more point to consider: The current offer is a taxable event for Canadians. If you have a capital gain on BN stock and the shares are in a non-registered account, it will be crystallized if you switch to BNRE and you’ll be taxed on your 2023 return.
Editor’s note: This article has been updated to reflect that the first phase of the CPP contribution increases announced in 2016 has already been implemented. The second phase of increases will kick in Jan. 1, 2024.
When did you start taking CPP? Was it too early or too late?
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Gordon Pape