Recent Changes Increase the Differences Between CPP and QPP

The general perception is that, for most purposes, the Canada and Quebec Pension Plans are closely aligned. And, generally, this perception is an accurate reflection of reality. However, starting in 1997, the Quebec government amended the QPP, to accommodate employees who phase in their retirement. Starting in 2011, the federal government introduced many of these same amendments into the CPP. However, “many of these same” does not mean that all have been implemented or that they have all been implemented in the same way. For employers, this is important, since the effect of these recent federal changes is to widen the differences that previously existed between the CPP and QPP.

Some of these changes, both to CPP and QPP, don’t impact employers, source deductions or year-end reporting. For example, both plans now provide for increased retirement benefits to those employees who delay taking CPP or QPP till age 70. However, these provisions don’t affect employers and so aren’t described here.

Employee ages play a prominent role in many of these changes. The following chart summarizes these changes, which are then explained in more detail below:

Employee Age CPP QPP

Under age 18

No difference,
there are no CPP or QPP contributions
on employees under age 18.

Age 18 to 54

No difference,
all persons in pensionable employment
are subject to CPP or QPP contributions

Age 55 and over

Age 55 has no impact on the CPP contributions required.

Where employees reduce their work hours, with employer consent, QPP contributions may still be owing on all or part of employee pre-reduction pensionable earnings.

Age 65 to 69

Employees may opt out of CPP contributions, if they are in receipt of CPP or QPP retirement benefits. CPP contributions are mandatory for employees not in receipt of CPP or QPP benefits.

Age 70 and over

CPP contributions stop
after age 70.

QPP contributions don’t stop at age 70, even for those in receipt of a CPP or QPP retirement pension. However, deemed pensionable earnings from phased retirement stop when employees reach age 70.

There are four aspects of the above chart that deserve explanation in further detail.

First, in the above chart, any reference to a person’s age means the first day of the month after that age has actually been reached.

Example: Mark turned 18 on May 22. Mark’s employer pays him on a bi-weekly basis, and his 18th birthday fell in the pay period paid on June 1. The work days for this pay period run from May 14 to May 27. All of the earnings paid to Mark on June 1 are CPP or QPP pensionable earnings, even those related to work performed before May 22.

Second, it’s important to explain the differences between the CPP and QPP options available, once employees approach retirement age. For QPP, these are employees aged between 55 and 69, while for CPP purposes this starts 10 years later, for employees between age 65 to 69. Where these options are not exercised, the default is that employers must calculate CPP or QPP contributions, the same as for any other employee. However, there are quite different CPP and QPP rules for exercising these options and for what happens when they are.

If an employee exercises the CPP option available between age 65 and 69, then all CPP contributions stop, at the first of the following month. The only restrictions are that this option, or any revocation of it, can only be done once every tax year. In other words, an employee who revokes this option in 2012, has to wait until 2013 to exercise it again. Employees exercise this option, or revoke it, by providing employers with a completed form CPT30, ElectiontoStopContributingtotheCanadaPensionPlan,orRevocationofaPriorElection. Employers must stop or start CPP contributions, including employer contributions, based on receipt of this form. In other words, unilateral employee decisions determine whether employer CPP contributions apply, since employer contributions always match employee contributions. Where an employee, between the ages of 65 and 69, has elected to opt out of CPP, no employer contributions apply.

By contrast, employers and employees must jointly agree on exercising the QPP option for employees aged 55 to 69, as well as being approved by the Quebec Pension Plan authorities, the Regie des rentes du Quebec. Approval will only be given where the reduction in employee income, because of the phased retirement, is no more than 40% of the employee’s previous income. The effect of any such phased retirement agreement is to deem part or all of this reduced income as pensionable earnings.

Example: Louise, at age 57 decides that she wishes to ease her way into retirement. As agreed with the employer, and after approval by the Regie, she cuts her hours of work from 40 hours per week to 35, a reduction of 12.5% (5 divided by 40). Before this reduction, Louise’s gross pay was $55,000 per year. After this reduction, her gross pay is $48,125 ($55,000 less 12.5%). The employer agreed that all of this difference, $6,875 would be deemed pensionable earnings for QPP purposes, even though this amount is not actually paid to Louise. As such, the employer must cap Louise’s pensionable earnings at $50,100, the year’s maximum for 2012.

Third, the QPP now treats employees at age 70 completely differently than the CPP. Employee CPP contributions stop at age 70, whether employees have applied for their CPP or QPP pensions or not. By contrast, the only impact of reaching age 70 on QPP contributions, is that phased retirement no longer applies. In other words, after age 70, QPP contributions are based on the pensionable earnings actually paid to employees. Even though a phased retirement agreement may still apply, no amount of any reduction in employee income from such an agreement counts as pensionable earnings, after age 70.

Fourth, this difference also has an impact on the annual maximums, in the year an employee turns age 70. For CPP purposes, stopping contributions at age 70 means prorating the employee maximum pensionable earnings, the employee year’s basic exemption and the employee maximum CPP contributions. Since, QPP contributions are ongoing after age 70, an employee’s 70th birthday doest not affect these annual maximums for QPP purposes.

Example: Judith turns 70 on February 25, 2012. For that year, for both CPP and QPP, the maximum pensionable earnings are $50,100 and the year’s basic exemption is $3,500. However, due to the difference in CPP and QPP contribution rates, 4.95 and 5.025%, respectively, the annual maximum contributions for CPP are $2,306.70 ($50,100 less $3,500, times 4.95%) and for QPP are $2,341.65 ($50,100 less $3,500, times 5.025%). There are 10 months after Judith’s 70th birthday (March through December), so her CPP annual amounts are prorated by 2 over 12:

  • her maximum pensionable earnings become $8,350 ($50,100 times 2 divided by 12);
  • her year’s basic exemption becomes $583.33 ($3,500 times 2 divided by 12); and
  • her maximum annual contributions become $384.45 ($8,350 less $583.33, times 4.95%).

If Judith is a salaried employee, paid on a monthly basis, and her pensionable earnings are $6,000 per month, she will hit her prorated maximum contributions for 2012 in February. This is for CPP purposes only. For QPP purposes, Judith would not have exceeded these annual maximums until September (9 times $6,000 exceeds the annual maximum pensionable earnings for 2012 of $50,100).

It’s important to emphasize, that despite these changes to the CPP annual maximums in the year an employee turns 70, there are no changes to the pay period basic exemption amount, determined based on the payroll frequency. For Judith above, when processing her CPP contributions, the monthly CPP basic exemption remains unchanged at $291.66.

For further information please feel free to contact me at armcewen@cogeco.ca, connect with me on LinkedIn or follow my blog at http://www.alanrmcewen.com

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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