Earlier this fall, a great debate unfolded on Twitter, as it often does. This one was not about fan-built worlds, nor was it about sustainability, it wasn’t even about Twitter itself and its high-profile acquisition earlier this year. But rather the Canadian Pension Plan (CPP) was the root cause of some seriously heated debate. And whether CPP is a tax or not.
CPP acts as a retirement funding system for the workforce through mandatory, income-based contributions that are paid into the CPP program, which accumulates funds from the contributions of both employers and employees. The money accumulated through this system is later used to provide those who qualify with retirement pensions, post-retirement survivor’s benefits, as well as death and disability benefits as needed. Most Canadians are eligible to receive such benefits once they reach the age of 65 with exception to those applying for disability pensions.
The official Government of Canada description of CPP refers to it as “retirement pension that is a monthly, taxable benefit that replaces part of your income when you retire.” Despite this there is much debate about whether CPP is ultimately just another tax at the end of the day, or whether it is truly a savings system designed to support retirement.
CPP is a Tax
The Fraser Institute is one of those firmly in the ‘CPP is a tax’ camp, stating “compulsory contributions to the CPP, which all workers must make by law, are absolutely a tax on workers. A ‘tax’ is a compulsory contribution for the support of government facilities, programs, services, or other spending levied on persons, property, income, commodities and transactions. CPP contributions clearly fit this definition as they are mandatory payments levied on eligible employment income to support a government program—the CPP.”
The Canada Pension Plan functions in a similar way to a tax, as people are required to contribute according to a set percentage of their income. Unlike other retirement plans, the money the government collects is then used not just to pay out retirees; it is also invested into the economy, allowing citizens access to certain government services such as healthcare. Additionally, when eligible retirees receive their payments each month, they are taxed and the revenue generated goes back into the CPP fund that contributed it. As seen through this circular process, it’s easy to understand how some will argue that the CPP more closely mimics a tax than an actual retirement plan.
CPP is not a Tax
By contrast, University of Victoria Economics Professor, Lindsay Tedds, was quoted in this Global News article, stating, “legally speaking, CPP contributions are absolutely not a tax. This is deferred compensation…we’ve had this since the 60s and there’s a reason for it.”
The argument that this camp makes is that unlike typical taxes, the funds paid into CPP are not used by the government; rather, they are directed into an individual's personal plan within the CPP system, making it more like a savings account or an investment fund than an additional tax. The contributions made to CPP are then used to provide a partial income replacement in retirement, which allows Canadians to maintain some financial security after they have stopped working. All earnings acquired through the CPP system accrue without any income tax being levied on them, and benefits from the plan do not affect eligibility for other government programs such as Old Age Security.
Therefore, although it has similarities with taxation in terms of its contribution structure and its compulsory nature for workers over 18 years of age, the CPP should be understood as a retirement plan developed by the Canadian government to help citizens maintain financial stability post-retirement.
So, differing viewpoints established, the question still remains….is CPP a tax? In my opinion, there is merit to both arguments. Retirement planning is a necessity, and CPP does help to support the financial needs of retirees in their later years. To get clarity on what retirement might look like for you, and how CPP will factor in, let’s set up a time to chat and review your financial plan.
CPP – By the Numbers
- CPP was established in 1965 in response to growing poverty levels among retired Canadians
- The average monthly CPP payment received by a retiring 65-year-old in 2019 was $679.16
- The maximum monthly payment that could be received that same year was $1,154.58
- The number of CPP contributors is expected to grow to 18.4 million by 2050 (up from 14.5 million in 2019)
- Total CPP assets hit $372 billion at the end of 2018 and are expected to $1.7 trillion by 2060
A member of WealthCo’s Integrated Advisory community, Graham Thiessen is a Partner and Co-Founder with Summit Path LLP. Graham is passionate about educating his clients, enjoys being a sounding board for them, and is deliberate about asking the right questions to show them a different way to look at their business. Graham’s driving purpose is to leverage his client relationships to make a positive difference in the lives of others.
The Integrated Advisory community consists of a network of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.