Should I reduce CPP payable on my taxes?
April 27, 2011 4:51 PM Subscribe
Quirky Canadian tax question - what's the long term impact of reducing CPP payable?
Due to illness, my sole proprietor business income dropped dramatically this past year. I'm at the point where I've reduced all tax payable and every deduction I now put in is reducing the CPP I need to pay.
While I don't want to pay very much, I'm very concerned abotu the long term implications of reducing the CPP payable. I mean, when I am 65, is the $X I just wrote off going to mean $Y a month less in benefits for the next 30 years?
Note: I am a single mother who took considerable time off for child bearing/rearing. Just fyi, as that affects long term income and CPP contributions. Yes, I know I can apply for a portion of my former partner's CPP. And, yes, I know I could ask an accountant, but my income is so low that this would eat away at grocery money, so I am looking to AskMe first.
Thanks.
Due to illness, my sole proprietor business income dropped dramatically this past year. I'm at the point where I've reduced all tax payable and every deduction I now put in is reducing the CPP I need to pay.
While I don't want to pay very much, I'm very concerned abotu the long term implications of reducing the CPP payable. I mean, when I am 65, is the $X I just wrote off going to mean $Y a month less in benefits for the next 30 years?
Note: I am a single mother who took considerable time off for child bearing/rearing. Just fyi, as that affects long term income and CPP contributions. Yes, I know I can apply for a portion of my former partner's CPP. And, yes, I know I could ask an accountant, but my income is so low that this would eat away at grocery money, so I am looking to AskMe first.
Thanks.
Yes, you probably should.
CPP calculations include both how much and how long you contributed.
To keep your pension as high as possible, we may drop the following parts of your contributory period from the calculation:
* periods when you stop working or your earnings are lower while you raise your children under the age of seven;
* any month when you were in receipt of a CPP disability benefit; and
* up to 15 percent of your contributory period in which your earnings were lowest.
Sounds like 1 & 3 would apply to you. In this case, don't sweat it, the 15% exemption most likely applies and you probably won't have any effect on your CPP benefits when you retire. If you like, take that 9.9% and stick it in an RSP - it will most likely do you more benefit there. If you don't think the 15% exemption will apply, you should be able to figure out the difference quite easily. To get right into it, you'll need to fiddle with the government's Retirement Income Calculator. Roughly, as you receive 25% of your average income as CPP payments, you should expect that a reduction of $1 in income this year will, if this isn't subject to your 15% exemption, result in an average income reduction of roughly 3 cents (47 working years between 18 and 65, minus child rearing and 15% years), meaning a reduction in CPP of 0.75 cents. Over 30 years, that is roughly 23 cents worth of benefits to you, but to pay 9.9 cents for that benefit in the future is probably not wise with inflation and the interest you could earn elsewhere, especially as money is tight for you now (unless you are near retirement age). If you made an average of more than 4 times the maximum benefit (currently ~$11200 per year but will be higher when you retire), then you won't see any difference.
If you have think you'll make more money next year, there are some deductions that you might be able to use next year instead (e.g. medical expenses).
posted by ssg at 6:54 PM on April 27, 2011
CPP calculations include both how much and how long you contributed.
To keep your pension as high as possible, we may drop the following parts of your contributory period from the calculation:
* periods when you stop working or your earnings are lower while you raise your children under the age of seven;
* any month when you were in receipt of a CPP disability benefit; and
* up to 15 percent of your contributory period in which your earnings were lowest.
Sounds like 1 & 3 would apply to you. In this case, don't sweat it, the 15% exemption most likely applies and you probably won't have any effect on your CPP benefits when you retire. If you like, take that 9.9% and stick it in an RSP - it will most likely do you more benefit there. If you don't think the 15% exemption will apply, you should be able to figure out the difference quite easily. To get right into it, you'll need to fiddle with the government's Retirement Income Calculator. Roughly, as you receive 25% of your average income as CPP payments, you should expect that a reduction of $1 in income this year will, if this isn't subject to your 15% exemption, result in an average income reduction of roughly 3 cents (47 working years between 18 and 65, minus child rearing and 15% years), meaning a reduction in CPP of 0.75 cents. Over 30 years, that is roughly 23 cents worth of benefits to you, but to pay 9.9 cents for that benefit in the future is probably not wise with inflation and the interest you could earn elsewhere, especially as money is tight for you now (unless you are near retirement age). If you made an average of more than 4 times the maximum benefit (currently ~$11200 per year but will be higher when you retire), then you won't see any difference.
If you have think you'll make more money next year, there are some deductions that you might be able to use next year instead (e.g. medical expenses).
posted by ssg at 6:54 PM on April 27, 2011
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posted by nelvana at 6:41 PM on April 27, 2011