On June 20, 2016, Canada's finance minister and several
provincial finance ministers announced their agreement in principle
to enhance the Canada Pension Plan (CPP) starting January 1, 2019.
All Canadian provinces, except for Manitoba and Quebec, executed
this historic agreement in support of an expanded CPP. The two
non-signatory provinces agreed to remain part of the ongoing
discussions to enhance the CPP.
Currently, the CPP covers earnings up to the Yearly Maximum
Pensionable Earnings (YMPE) threshold, which is set at $54,900 for
2016. For earnings up to the YMPE, the pension provided under the
CPP is designed to replace 25% of pre-retirement income, which
means that the maximum CPP pension is $13,100 per year. CPP
contributions are currently 4.95% of earnings up to the YMPE for
both the employer and the employee.
The enhanced CPP aims to increase the income replacement from
25% to 33.3%, and to raise the YMPE income threshold from $54,900
to $82,700 upon full implementation in 2025. To cover the cost of
the increased benefits, the contribution rate is estimated to go up
1% to 5.95% for each of the employer and the employee.
To ensure that these changes are affordable for businesses and
their employees, Finance Canada announced a number of measures:
a long and gradual 7-year phase-in starting on January 1, 2019
to give time for all stakeholders to prepare for and adjust to the
new CPP, consisting of
a 5-year contribution rate phase-in below the YMPE, followed
a 2-year phase-in of the upper earnings limit
an enhanced federal Working Income Tax Benefit to offset the
impact of the increased contributions on low-income employees
a tax deduction for employee contributions associated with the
enhanced portion of the CPP in order to avoid increasing the
after-tax cost of savings for Canadians
For low- and middle-income contributors whose earnings are under
the current CPP earnings threshold, the new CPP will increase
income replacement up to 33.3%. For the higher-income contributors
whose earnings are above the current $54,900 YMPE earnings
threshold, the increase of the YMPE earnings to $82,700 by 2025
means that they will also have income replacement of 33.3% for
earnings in between $54,000 and $82,700 that were not previously
covered by the CPP.
The end of the ORPP
The Ontario Premier indicated that the Ontario-made retirement
savings program, the Ontario Retirement Pension Plan (ORPP), will
not proceed if the CPP enhancements that have been agreed upon go
ahead. This means the end of the ORPP assuming the final agreement
between the federal and provincial governments to boost the CPP is
ratified in July 2016.
Although the benefits that would be provided under the enhanced
CPP are less than those proposed under the ORPP framework, the CPP
will have a much wider impact for Canadians because it is a
national solution to the problem of inadequate retirement
Implications for employers
Ontario employers will welcome the regulatory simplicity of
complying with only one mandatory government sponsored pension
plan. Even though the ORPP is not moving forward, employers still
have to pay attention to the CPP expansion details.
Employers that sponsor workplace pension plans with a CPP offset
need to review the details of their plans and make the necessary
adjustments. In the unionized environment where changes to the
pension plan are subject to collective bargaining, we expect that
the gradual phase-in of the CPP expansion will allow sufficient
time for the negotiation and implementation of any changes.
Employers that sponsor pension plans that do not currently
integrate with the CPP may want to consider this
The expansion of the CPP is an impressive achievement for the
current federal and provincial governments. It is noteworthy that
any changes to the CPP require the consent of two-thirds of the
provinces representing two-thirds of Canada's population. The
joint statement of the federal and Ontario governments indicates
that approval by the provinces of the proposed CPP enhancement
agreement in principle must occur by July 15, 2016. This means that
in less than one month, the federal and provincial governments
could make history by agreeing on the most significant pension
reform of our generation. We applaud the collaboration of both
levels of government to ensure that future generations of Canadians
can count on a strong public pension system in their retirement
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