So You Have A CCPC, Should You Stop Contributing to CPP?

You have your own business. Whether it’s incorporated, a proprietorship, or a partnership, planning for your financial future is an important action to take. Everyone has a different financial strategy that is tailored to their own unique situation and yours is no different! You could own a rental property, have a TFSA, invest in the stock market, Mutual Funds, the list goes on. For us regular folks, it certainly includes the Canada Pension Plan. So, when does contributing to CPP become less beneficial?

If you have paid into the CPP, then you are guaranteed to receive money when you become eligible to collect it. This amount that you are entitled to depends on the percentage of the yearly maximum you have paid over time… sounds simple. You pay in and you get your money out just like any pension plan…

– BUT –

at a certain point, contributing to CPP may not be the best plan for you.

Here’s An Example of CPP Not Being The Best Choice

In general terms, there is a point where your continued contribution to the CPP may not be your best choice; in one case, a client of mine was planning to retire in 10 years and had been contributing the maximum to CPP for over 35 years. I “ran the numbers” and determined that if he continued to contribute the Yearly Maximum to the CPP, he would only be increasing his month income by $ 6.00 when he begins collecting CPP in 10 years!  

For him to recover his next 10 years of CPP contributions, he would need to live 635 years just to break even!

How Do We Solve This Challenge?

We stopped paying into the CPP by having him receive a dividend from his CCPC. Dividends are not classified as “pensionable Earnings” so no further CPP contributions are required.

With the maximum CPP contribution for 2018 being $2,594 each for himself as an employee of his CCPC and as an additional “employer portion” of $2,594 required, he saved $5,188 this year alone!

This, on its own seems like a good reason not to contribute further. Add to that the maximum CPP contribution for 2019 of $2,748 each for the employee and the employer, and the savings go up to $5,496 in 2019.

Under federal Government’s announced “CPP enhancement” the yearly maximum will continually increase until 2022 at which time, if your “pensionable earnings” exceed $60,000, you will be required to pay an additional 4% on what exceeds $60,000.

Suggestions for the Self-Employed

If you are self-employed and not incorporated, you may want to speak to your CPA about your options. If you are incorporated, you may want to choose to stop receiving a salary and begin earning your income as dividends.

Have your CPA “run the numbers” for you as each individual and each situation are different: