The Canada Pension Plan (CPP) is a federally regulated pension plan designed to provide employees with a pension in addition to the Old Age Security Plan. Employers are responsible for deducting the employee’s contribution from each pay until the annual maximum contribution is reached. Employers must then remit both their and the employee’s share of the contributions to the federal government on a regular basis.
Currently, Canada Pension Plan (CPP) contributions are no longer paid once a person is receiving a CPP retirement pension, or once the person is 70, whichever is earlier. Prior to 2012, if an employee took their CPP retirement pension before age 65, but wanted to keep working, they had to either stop working or significantly reduce their earnings for at least two consecutive months, as required by the CPP “work cessation test.” Once an employee began to draw their CPP, they could no longer contribute to it and increase their CPP retirement pension even if they continued working
Starting January 1, 2012, employees between the ages of 60 to 70 years’ old are able to take their CPP retirement pension without having to stop working or reduce their earnings. By eliminating the work cessation test, Canadians will be able to transition to retirement gradually and more easily. When they decide to retire is a whole other issue.
On January 1, 2012, changes to the rules for deducting CPP contributions will come into effect. These legislative changes do not affect the salary or wages of an employee who is considered to be disabled under the CPP, nor do they affect the salary and wages of a person who has reached 70 years of age. In addition, individuals will not be affected by these changes if they started receiving a CPP retirement pension before December 31, 2010, and they remain out of the workforce.
The changes will affect those who are employed and are aged 60-70 years old and receiving a CPP retirement pension. Those collecting their pension prior to 2012 will have to start contributing again in 2012 if they are receiving pensionable earnings, are still working, and have not yet reached 70 years of age. For employees who are at least 65 years of age but under 70, and who work and receive a CPP or QPP retirement pension, they are able to opt out of contributing to the CPP by filing an election to stop paying CPP contributions.(see below for specific details).
Now, employees can retire early, choose to work, and continue to build additional CPP pension benefits called Post-Retirement Benefit (PRB). Each year that an individual contributes to the CPP while receiving a CPP pension will generate a new PRB, even if the individual is already receiving the maximum pension benefit. The amount of the PRB will depend on the earnings level of the contributor and their age.
This post only deals with CPP contribution changes in January 2012. The next post will deal with changes to the Canada Pension Plan (CPP) benefits and the Post-Retirement Benefit.
What employers need to know
- Starting January 1, 2012, employers must deduct CPP contributions for all employees aged 60 to 65-even if the employee is currently receiving a CPP or Quebec Pension Plan (if they are receiving QPP and working outside of Quebec) retirement pension. These contributions will increase their CPP retirement benefits by up to 42 percent starting in 2013.
- Employers must also deduct CPP contributions for all employees who are 65 to 70 years of age unless they elect not to contribute to the CPP by giving the employer a signed and completed copy of Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election. They must also send the original to the Canada Revenue Agency (CRA).
- Employees must stop contributing to the CPP after the month in which they turn 70 years of age.
Stopping CPP contributions
Before the employee can stop CPP contributions, the employer should ask the employee to provide all of the following:
- Confirmation that he or she is receiving a CPP or QPP retirement pension (for example, a copy of the award letter)
- Proof of age (the employee must be at least 65 years of age but under 70)
- A copy of a signed and completed Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election. An employee who wants to elect to stop contributing to the CPP will have to complete Parts A, B, and C of Form CPT30
When the employer is in receipt of a signed and completed election form (CPT30) from an eligible employee, the employer should stop deducting CPP contributions as of the employee’s first pay in the month following the month the employee signed and dated the election form. However, you will stop deducting CPP contributions according to the employee’s pay period schedule. It is important to note that you have to continue to deduct CPP contributions from your employee’s pensionable earnings until your employee provides you with a completed Form CPT30 or a copy of a completed form that the employee filed with a previous employer.
Employers may need to prorate the employee’s CPP basic exemption and maximum CPP contributions for the year for an employee 65 years of age or older who elects to stop contributing to the CPP part way through the year. For more information, go to the CRA examples on how to prorate the maximum contribution to CPP.
Revoking and re-starting CPP contributions
An election cannot be revoked in the same calendar year in which it is made. That is, an employee cannot elect to stop and start paying CPP contributions during the same calendar year.
Starting in 2013, an employee who had elected to stop contributing to the CPP in a previous year will be able to revoke that election and start contributing to the CPP again. The employee is eligible to revoke an election if he or she is employed and receiving pensionable earnings, has filed an election form (CPT30) to stop contributing to the CPP in a previous year and now wants to revoke it, and did not make or revoke a previous election in the current calendar year.
The employee will need to complete Part D of Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election and give a copy of the completed revocation form to the employer and any other employer he or she has. In addition, the employee will have to send the original completed revocation form to the CRA.
When the employer receives a signed and completed revocation form (CPT30) from an eligible employee, he or she should start deducting CPP contributions from the employee’s pensionable earnings on the first pay in the month following the month the employee gives the employer the revocation form. Generally, this will be the date the employee entered in Part D of the revocation form.
The employer may need to prorate the employee’s CPP basic exemption and CPP contributions for the year for an employee who revokes a prior year election and wants to start contributing to the CPP part way through the year. For more information, go to When do you have to prorate the maximum contribution to CPP? on the CRA website.
The employer will also have to make CPP contributions. They will have to pay an amount equal to the amount deducted from the employee’s remuneration for CPP contribution when he or she sends their remittance to the CRA.
Note that employers are required to deduct these contributions even if the employee was not contributing in a previous year because he or she was receiving a CPP or QPP retirement pension.
Payroll processes will need to change for 2012 to ensure deductions for CPP are made for this new group of employees as necessary, and to properly deal with related elections and revocations on a timely basis.
The CRA can assess the employer for failing to deduct CPP contributions or for failing to remit CPP contributions to the CRA as required. The assessment may include penalty and interest charges.
Similar rules apply for individuals who are self-employed, at least 60 years of age but under 70, and who receive a CPP or QPP retirement pension. For self-employed individuals who are at least 65 years of age but under 70 and eligible to opt out of contributing to the CPP, they can do so by completing the applicable section of Schedule 8, CPP Contributions on Self-Employment and Other Earnings for 2012 and filing it with their Income Tax and Benefit Return for 2012. The earliest month an election can take effect is the first month following the month of the individual’s 65th birthday. The election will stay in effect until the individual is 70 years of age or until they revoke the election.
Note that individuals who are both employed and self-employed should use form CPT30 for elections and revocations.
Source: Canada Revenue Agency
First Reference Human Resources and Compliance Managing Editor