Canadian Small Business Owners and CPP – What is the Deal?

For business owners in British Columbia, the trend of remunerating shareholders with dividends instead of salaries and/or management bonuses has been going on for years.  The low corporate tax rate of 13.5% on the first $500,000 of corporate profits in conjunction with total CPP premiums of $4,712 on the first $51,100 of salary paid to each shareholder/manager created a strong tax planning argument to take dividends instead of salary.

Currently, with discussion in Ottawa to further expand the CPP program, business owners who have diligently paid into the CPP pool in the past face further “payroll tax” increase.

The CPP premiums for most business owners is at $ 4,712 per year, which is the current maximum, and the amount increases every year.  The reforms being discussed include doubling this annual “payroll tax” and pushing the maximum pensionable amount to slightly over $100,000 from the current $51,100.  The CPP benefit entitlement is expected to increase with the premium increase.

What can business owners do for themselves and their retirement planning.

The first step is assess your current status on the CPP issue by contacting Service Canada at 1-800-277-9914.  A Service Canada representative will take your call and ask some basic security questions.

After successfully fielding some security questions, the taxpayer can request a current statement of CPP benefit entitlement and a personal access code (“PAC”), which will be sent to their home address. Both pieces of information are important because the statement lets the taxpayer know their current status and the PAC will allow the taxpayer to go online, access their own account, and use various future “what if” scenarios to see how their CPP benefits will be impacted. For example, the program allows a taxpayer to see how much the CPP benefit at retirement will be if they decide to stop contributing to the CPP program today or if they contribute less than the maximum.

All of this is powerful information because a taxpayer who is already entitled to 80% of the maximum at retirement, but is only at age 50 today, may not want to continue contributing the maximum CPP premium until he stops working.  On the other hand, if the taxpayer expects to live until 90 years old because that is the age their predecessors have historically achieved, then the taxpayer would be wise to continue contributing the maximum amount.

I did the above exercise for myself and two other clients who took the time to call Service Canada to get the required information. The end result was more clarity on the entire CPP issue. Each taxpayer now knows the investment and the likely financial outcome.  Taxpayers who have longevity in their gene pool may be wise to maximize their CPP benefits, and others may want to retain the $4,712 per year contribution.

Business owners will find this quick call to Service Canada a worthwhile investment.

If you are looking for personal or corporate tax planning services or have questions, please don’t hesitate to contact us to learn more about how we can help you!

Disclaimer: All Rights Reserved for Mew & Company. This blog post is designed to provide information for personal use only. Please consult your professional tax advisor for further information. Mew & Company is not responsible for any legal disputes resulting from the content of this blog post.