Opting out of CPP Premiums

We have noted that more and more of our clients are working well past what would normally be considered “retirement age”.

Of course, economic need is often the motivation. But we know, in most cases, that’s not the reason – most of these individuals can afford to retire, now. They simply don’t want to.

Without exploring the sociological issues that may be relevant in this decision, we are left with the fact that many persons age 60 or over have chosen to remain working, even though they may have decided to draw on their CPP early (which remains their privilege, although they must suffer a discount for doing so).

Until 2012, drawing a CPP pension automatically exempted you from having to pay CPP premiums – full stop. As of January 1, 2012, that changed: now, anyone who works for T4 wages and hasn’t had their 65th birthday must contribute to the CPP, whether or not they are already getting it. Blame the Government’s constant need for more revenue sources.

That annoys a lot of people, who view this simply as a disguised tax increase. The annual maximum CPP premium for the self-employed (or those who own their own corporations) in 2013 is $4,712 if your salary or wage is $51,100 or higher. While not precise, a contribution of this amount might generate additional CPP payments to you of about $250/year. Or about 19 years to recover your “investment”.

If you don’t like that “rate of return”, persons who are between 65 & 70 years of age (but not younger) can opt-out. Opting-out is a somewhat complicated process, involving the filing of Form CPT30 with both your employer, and the Winnipeg office of the Canada Revenue Agency. But it can terminate your obligation to pay into the system, once and for all. Please contact us for information on that process.

But yes, those folks who want to work for wages past age 70 are exempt from paying in. Congratulations to those lucky ones !

What many more clients are doing, however, is avoiding this whole issue completely. They do that by switching from salary to dividends. With today’s very flexible share rights, it is possible to engineer dividends almost as easily as salaries. But of course, your corporation needs to have the right kind of shares, with the discretion to set dividends, and to discriminate between shareholders, built into the corporate articles. That takes some planning, and some degree of expense. But with the likely skew in favour of dividends noted elsewhere in this newsletter, dividends offer yet another advantage: a means of legally avoiding CPP, while keeping you “still in the game”.

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