Some taxpayers may not even notice this, but line 42100 of a T1 tax return says “CPP contributions payable on self-employment income and other income.” Contributions might be calculated in accordance with Schedule 8 or Form RC381, whichever is applicable.
Most self-employed individuals are required to pay CPP contributions, but there could also be alternatives. Whether it’s price pursuing is one other story.
Deregistration from CPP
If you might be under 65, you should contribute to the CPP when you receive a salary or self-employment income. Once you reach age 65, you might elect to stop making CPP contributions until age 70.
If you might be an worker, you should file Form CPT30, Election to Stop Contributing to the Canada Pension Plan or Revoke a Previous Election to your employer(s) and to the Canada Revenue Agency (CRA). You should be receiving a CPP or Québec Pension Plan (QPP) pension and be between 65 and 70 years old.
Self-employed taxpayers must complete Schedule 8, Canada Pension Plan Contributions and Overpayments (for all but QC) as a part of your tax return on time for the appliance for the previous tax 12 months. Quebec residents can opt out of the QPP when filing their TP1 provincial income tax return.
What when you are under 65?
Younger taxpayers have the choice to opt out of CPP or QPP in the event that they are self-employed. If they earn their self-employment income through a company they own and pay themselves dividends in lieu of their salary, no CPP contributions are payable.
An owner-manager of an organization will pay himself dividends as a shareholder or a salary as an worker. To have this flexibility, an unincorporated sole proprietor can form an organization.
Dividends are a distribution of company profits after taxes. The corporation first pays corporate tax on the profit, after which the recipient shareholder is taxed a dividend at a lower personal tax rate to reflect the company tax already paid.
The article continues below promoting
X
Salary is a deduction for an organization. So if an organization pays out all of its income as salary, it has no income and subsequently no taxes. All taxes could be paid personally.
The combined tax must be comparable between dividends and salary. There are subtle differences between provinces and depending on income levels. And some deductions can only be claimed if you have got earned income.
With the best marginal tax rate, Saskatchewan and the Northwest Territories are the one places in Canada where dividends lead to a lower integrated tax rate than salaries. However, the savings in payroll are small – generally around 0.5% to 1.5%. NWT is the outlier with tax savings of over 3% when a high income owner/manager receives dividends above their salary.
Is CPP a tax?
CPP contributions usually are not actually a tax, although they’re administered through the payroll or income tax systems. These contributions secure a future retirement pension in addition to a possible disability or survivor’s pension.
It is a standard misconception that the federal government will use the CPP for an additional purpose or that it isn’t a future pension for young people.
The Canada Pension Plan Investment Board (CPPIB) manages CPP funds and is “accountable to Parliament and federal and provincial ministers, however [they] act independently [and are] led by an independent board.” The government cannot withdraw money from the CPP.
The thirty secondnd Canada Pension Plan Actuarial Report was recently published and provides sustainable forecasts for the subsequent 75 years.
Many government public pensions world wide differ from Canada’s funded CPP pension, which has assets of around $800 billion. Some primarily use current 12 months contributions to finance current pension payments, which poses risks given the aging population. The trustees expect U.S. Social Security to be in a funding deficit by 2032 unless changes are made to contributions or pensions. CPP is an outlier.
