Regulations Amending the Income Tax Regulations (Enhanced CPP Contributions): SOR/2022-42

Canada Gazette, Part II, Volume 156, Number 6

Registration
SOR/2022-42 March 4, 2022

INCOME TAX ACT

P.C. 2022-197 March 3, 2022

Her Excellency the Governor General in Council, on the recommendation of the Minister of National Revenue, pursuant to subsection 221(1) footnote a of the Income Tax Act footnote b, makes the annexed Regulations Amending the Income Tax Regulations (Enhanced CPP Contributions).

Regulations Amending the Income Tax Regulations (Enhanced CPP Contributions)

Amendments

1 (1) The portion of subsection 100(3) of the Income Tax Regulations footnote 1 before paragraph (a) is replaced by the following:

(3) For the purposes of this Part, where an employer deducts or withholds from a payment of remuneration to an employee one or more of the following amounts, the balance remaining after the deducting or withholding of the amount or amounts shall be deemed to be the amount of that payment of remuneration:

(2) Subsection 100(3) of the Regulations is amended by striking out “or” at the end of paragraph (c), by adding “or” at the end of paragraph (d) and by replacing the portion after paragraph (d) with the following:

Coming into Force

2 These Regulations come into force on January 1, 2023.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

As of January 1, 2019, Canadians are contributing more to the Canada Pension Plan (CPP) and the Québec Pension Plan (QPP), which will provide enhanced benefits to contributors. This change, known as the CPP/QPP enhancement, is designed to help increase retirement income for working Canadians and their families. Related amendments were made to the Income Tax Act (ITA), which allow for a tax deduction for enhanced contributions, and came into force in 2019. The amendments were made as part of the 2016 An Act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act. These legislative amendments require administrative amendments to the Income Tax Regulations (the Regulations). Should these Regulations not be amended, the amount of the employee’s additional CPP and/or QPP contributions may not be taken into account when calculating the individual’s base income for purposes of deducting or withholding income taxes. This could result in the employer withholding more income tax than necessary. While the risk is low, as any over-contributions would be reconciled on the filing of the employee’s income tax return, the amendment ensures necessary consistency between the Regulations and current federal legislation.

Background

The Canada Pension Plan Act (CPPA) was amended in 2016 in order to enhance the CPP retirement and supplemental benefits, which include the disability pension, the survivor’s pension, the children’s benefit and the death benefit. Related amendments were made to the ITA to allow for a tax deduction for the enhanced portion of CPP/QPP contributions. These enhancements became effective in 2019 and are being funded by additional contributions by employees, employers and self-employed individuals. The CPP enhancement will happen in two phases over seven years. Phase 1 takes place from 2019 to 2023 and involves a gradual increase (enhancement) of 1% in the contribution rate (from 4.95% to 5.95%). Phase 2 will begin in 2024 and will only affect those at higher income levels. The additional contribution amounts are outlined in Schedule 2 of the CPPA.

The province of Quebec has a similar compulsory provincial program to the CPP. The QPP is established by An Act respecting the Québec Pension Plan (the QPPA). The QPP is also funded by contributions made by employers, employees and self-employed individuals. The benefits provided by the QPP include the retirement pension, the disability pension, the surviving spouse’s pension, the orphan’s pension and the death benefit. In 2018, the QPP was also enhanced in a manner similar to the CPP.

The effect of the introduction of the enhanced CPP/QPP has meant that CPP/QPP contributions must be separated into two parts for the purposes of payroll calculations: base CPP/QPP contributions and enhanced CPP/QPP contributions. For employees, base contributions are calculated at a rate of 4.95% for CPP and 5.4% for QPP. Any amount above this is considered to be an enhanced contribution. Employees are entitled to a 15% federal tax credit on base contributions and can claim a tax deduction for the enhanced portion. The difference is the tax credit reduces the amount of tax payable, whereas a tax deduction reduces the amount of taxable income.

For self-employed individuals, the base contribution for CPP is calculated at a rate of 9.9% (to account for the employee and employer contributions) and the enhanced portion is any amount above that. Similarly, for self-employed individuals participating in the QPP, the base contribution is calculated at a rate of 10.8% and the enhanced portion is any amount above that. Self-employed individuals can claim a 15% federal tax credit on 4.95% (employee portion) of the base CPP contributions and 5.4% of the base QPP contributions and claim a tax deduction on the other 4.95% (employer portion) or 5.4%. They can also claim a tax deduction on the enhanced portion of their contributions.

The rules for calculating the amount of the additional required contributions by employees, employers and self-employed individuals were prescribed in the Canada Pension Plan Regulations in 2019. Enhanced contribution rates for the QPP are found in section 44.2 of the Act respecting the Québec Pension Plan.

For additional information please consult the news release published by the Canada Revenue Agency (CRA), The Canada Pension Plan enhancement – Businesses, individuals and self-employed: what it means for you, or Retraite Québec’s webpage: The additional plan.

Objective

The purpose of this amendment is to update the calculations outlined in the Regulations to correspond with tax deductions under the ITA that came into force in 2019. This will ensure that the amount of the employee’s additional CPP and/or QPP contributions are correctly taken into account by the employer when calculating the individual’s base income for purposes of deducting or withholding income taxes.

Description

Subsection 100(3) of the Regulations contains amounts that are deducted from an employee’s base pay for purposes of calculating withholding income taxes. It specifies the calculation to be used (which includes various deductions from employment income) in order to determine a taxpayer’s employment income subject to income tax source deductions.

The amendment to the Regulations specifies that contributions to the enhanced CPP or QPP are to be deducted from employment income. This amendment aligns the Regulations with paragraph 60(e.1) of the ITA, which was introduced to provide a deduction for enhanced contributions made to the CPP or a similar contribution under a provincial pension plan.

This regulatory amendment will come into force on January 1, 2023.

Regulatory development

Consultation

The key stakeholders are employers who calculate and remit source deductions on behalf of employees; employees who pay enhanced contributions to the CPP and QPP; and payroll service providers and payroll software providers.

There has been significant consultation for the purposes of communicating the impact of the legislative changes to the CPP and QPP since 2016. In addition to targeted engagement sessions with payroll service providers and income tax professionals, the CRA held online public consultations with self-employed individuals from May to July 2019 to gauge their understanding of the impact of the changes to the CPP/QPP. Details on this consultation can be found on the CRA’s website at Canada Pension Plan Enhancement Consultation with Self-employed Individuals - Part One.

This regulatory amendment was exempted from prepublication, as the change to the Regulations is administrative in nature, and serves to align the Regulations with a legislative amendment already in force.

Instrument choice

There are no non-regulatory options available for amending the calculation. A regulatory amendment is required to align with the changes to paragraph 60(e.1) of the ITA already in effect.

Regulatory analysis

Benefits and costs

Aligning the Regulations with the ITA adds necessary clarity that would serve to prevent excessive in-year source deductions by employers. For an employee contributing on the maximum insurable earnings each year, excessive withholdings is estimated between $4 and $168 depending on the employee’s income. Rather than having this returned to the taxpayer when they file their taxes, that amount will not have been withheld by the employer.

The implementation of this regulatory amendment imposes minimal costs to the CRA. Costs include activities such as updating employer publications and payroll deductions formulas’ guides to incorporate the regulatory alignment. Minor systems changes are also required. Any costs incurred by stakeholders relate to the previous legislative amendment; there are no new regulatory costs associated with this amendment.

Small business lens

This regulatory amendment aligns with legislative changes already imposed on employers of businesses of all sizes, including self-employed individuals. The same practices and procedures for the collection, remitting and reporting of contributions are required of all employers. As the Regulations do not impose any additional administrative burden on the employers, the small business lens does not apply.

One-for-one rule

This regulatory amendment neither increases nor decreases administrative burden on business. This amendment aligns the calculations in the Regulations with the deductions in the ITA. Any costs incurred by stakeholders would have resulted from the requirements imposed by legislation previously implemented under the CPP and QPP Acts.

Implementation

Although the impact of the new legislation was communicated to stakeholders through engagement sessions and online consultations prior to the changes taking effect in 2019, the CRA extended administrative relief to employers from the separate accounting of base and enhanced contributions to the CPP/QPP until December 31, 2022. The administrative relief is intended to allow employers, payroll software providers and payroll services providers time to make the necessary structural changes to their accounting programs. Employers found to be non-compliant with the withholding requirements prescribed in the Regulations after December 31, 2022, may be subject to penalties and interest.

Contact

Stakeholder Relations
Business Compliance Directorate
Collections and Verification Branch
Canada Revenue Agency
Email: CPPEBRPCG@cra-arc.gc.ca