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With 2 Canada Pension Plans, tax relief for contributions is more interesting

Posted by David Gobeil on

The base CPP pension is the original CPP retirement pension introduced in 1965 that provides a retirement benefit of 25% of your average monthly pensionable earnings.

The First Additional Pension is an enhancement to the Base CPP pension introduced in 2019 that increases your retirement pension by 8.33% of your average monthly pensionable earnings.

As an employee, your contributions to the base portion of the CPP result in non-refundable federal and provincial tax credits but your contributions to the enhanced portion of the CPP will be deductible for income tax purposes.

This sort of partially corrects a penalty or anyone who's taxable income will put them in the second or higher tax bracket during retirement when they draw their CPP retirement benefits. For contributions to the base CPP, you receive a tax credit with a conversion rate of maybe 20% and when you receive your benefits they are taxed at a rate as high as 53%. Thanks Ottawa.

 I would expect that the calculations in the following example would never appear on any of the p[professional financial Planning examinations. However, you might want to understand what is going on with the income tax treatment.

 For 2020, Emilio is self-employed, and he expects that his business income will be $82,000. His marginal tax rate (MTR) is 38%. The federal conversion rate for the CPP contribution tax credit was 15%. He lived in a province with a conversion rate for the CPP contribution tax credit of 9.8%. Emilio will have to pay base and first additional CPP contributions of $5,796.00.

 What will be the amount of Emilio’s total tax relief on these contributions?

 For the answer, see the following post entitled, Emilio files his tax return.


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