Let's tackle a not-so-fun yet important topic: recent CPP contribution changes that will impact self-employed Canadians the most (this includes you side hustler, freelancer and subcontractor).
With the cost of doing business rising because of so many factors like inflation and interest rates, it's wise to understand these changes and how they will impact you.
So here we go, we're going to cut through the complexity to explain why you should care about these changes and how they impact your bottom line.
How CPP Contributions Work for Self-Employed Canadians: A Straightforward Guide
Contribution Based on Net Income: You'll contribute to the CPP based on your net business income and any other net income, after deducting business expenses and other eligible deductions such as RRSP contributions.
Contribution Rates: For 2023, the contribution rate is 11.9% of your net income, up to the Year's Maximum Pensionable Earnings (YMPE). These amounts have been rising quickly up from just 9.9% 5 years ago.
Years Maximum Pensionable Earnings (YMPE): Right now you are tempted to stop reading, there's nothing that could sound as dry and boring as YMPE… BUT this part matters. The YMPE is the maximum amount you have to pay CPP on for that year. For instance, if the YMPE is $66,600 and your net income is $75,000 you pay CPP on only $66,600 in income. If your income is $45,000 you pay CPP on $45,000.
Along with CPP rates increasing over the last 5 years, so too has the YMPE from $55,900 in 2018 to $66,600 for 2023. That means you pay that 11.9% on over $10,000 more income now than you did in 2018. This is a tricky way that our CPP contributions are increased without the splashy announcements of rate increases.
New Changes in 2024: Starting in 2024, a second contribution rate will apply. Let's consider this YMPE's long lost older cousin. If your income exceeds the YMPE, you'll contribute an additional 8% on the excess amount, up to the Year's Additional Maximum Pensionable Earnings (YAMPE). Gotta love the acronyms…
So in 2024 we have not only a YMPE to consider but now also a YAMPE. The YAMPE for 2024 is $73,200 and for 2025 is estimated at $79,400. Notice that big jump? Again - these maximum amounts don't get the press headlines big rate hikes get. They are a slippery way to increase contributions and the amount of CPP you owe at tax time.
To follow through our example from above, if you made $75,000 as a self-employed person in 2024 you would pay:
YMPE $68,500 less $3500 basic exemption at 11.9% = $7,735
+YAMPE $73,200 (the lower of the YAMPE or your income) less $68,500 at 8% = $376
Total CPP 2024 = $8,111
Total CPP 2023 = $7,509
That's an increase in CPP of $602 over just one year with another big increase coming in 2025. Unfortunately we can't quantify this because the YMPE for 2025 hasn't been released yet BUT the YAMPE is 8.5% higher in 2025 vs 2024 so it will certainly be significantly more money.
Tax Credits and Deductions: Fortunately, you can claim a 15% non-refundable tax credit on the base CPP contributions and a tax deduction on the enhanced portion of your contributions.
Do these increases apply to employment income as well? Yes, they do. However as an employee your employer pays half of your CPP contributions which is a big help. If you are paying yourself as an employee out of a business that is incorporated the corporation will pay half and you will personally pay the other half as a payroll source remittance.
If your income is lower than the YMPE you don't have to worry as these changes will not impact you. The basic rate for 2023 will stay the same in 2024.
So, what can you do in light of these CPP changes? The best approach is to fully understand and prepare for them. Knowledge is power here – knowing how these increases affect you allows for smarter financial planning. We've seen first hand buzz online about incorporation as a solution. We caution you with this strategy as it's crucial to weigh this option carefully. Each choice has its implications, and what works for one may not be the best for another. Stay informed, consider your unique situation, plan accordingly and seek professional advice when unsure.
For a more detailed understanding of what incorporation means for you, especially in the context of CPP and many of the other factors you need to consider, take a look at our one-hour mini-course and custom calculator Should I Incorporate? It's designed to help you make a well-informed decision.
As we wrap up, it's really important to keep on top of these CPP contribution increases, especially now when everything else is getting pricier. It boils down to making smart decisions that fit both what you need right now and what you're aiming for in the future. The main thing is to make choices that are good for your financial health.
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Wishing you success in your business,
- Martina + Ashli
Date published: December 13, 2023
Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.