Small Business Owners and Self-employed entrepreneurs who have not incorporated their businesses, pay Canada Pension Plan (CPP) as a part of the calculations on their personal tax returns.
So whether or not your business is incorporated is not a factor. Nor is it whether or not you pay yourself a “salary.” For tax purposes, the Canada Revenue Agency (CRA) considers you and your business a single entity, and you will be treated like one.
CPP is a mandatory program that provides retirement income to individuals working in Canada. The amount you receive as a CPP retirement benefit when you retire is a function of how much you paid into the program during your working years. As a self-employed individual, it's important to understand your responsibilities and contributions to the CPP.
Who is Considered Self-Employed?
The Canada Revenue Agency (CRA) recognizes several types of self-employed individuals, including sole proprietors, business partners, freelancers, independent contractors, and those involved in direct sales. Essentially, if you earn income on your own outside of traditional employment, you are considered self-employed by the CRA. To determine employee vs self-employed status, it is important to look at the various factors that CRA considers. If you are still unsure about your employment status, you have the option to ask CRA for a ruling, so they can determine whether you are an employee or self-employed and whether your employment is pensionable or insurable.
How do I pay CPP when self-employed in Canada?
As a self-employed individual in Canada, you are responsible for paying both the employer and employee portions of the Canada Pension Plan (CPP) contributions. Here are the steps to pay CPP when you are self-employed:
- Register for a Business Number (BN):
- Determine Your Contribution Amount:
- Report CPP Contributions on Your Income Tax Return:
- Make CPP Contributions – Installments or lump-sum payment
- File Your Income Tax Return:
- Maintain accurate records of your self-employment income, expenses, and CPP contributions for tax purposes
- Stay updated with any changes to CPP contribution rates or regulations by visiting the CRA website or consulting with a tax professional or accountant in Toronto.
By following these steps, you can ensure that you meet your CPP obligations as a self-employed individual in Canada and contribute towards your retirement benefits.
Who Needs to Contribute to CPP?
If you're between the ages of 18 and 70 and earn more than $3,500 per year, you are required to contribute to the CPP. This applies to both regular employees and self-employed individuals.
CPP Contributions - Key Differences for Self-Employed
For CPP, the key difference for self-employed individuals is the contribution rate (and corresponding contribution amount). For regular employees, CPP contributions are shared between the employee and the employer. However, as a self-employed individual, you have the responsibility of both the employee and employer contributions to the CPP. This means you'll need to contribute twice the annual percentage up to the yearly maximum.
The CPP contribution rates for self-employed individuals are subject to annual adjustments. It's essential to check the CRA website for the most up-to-date rates.
To calculate your annual CPP contributions at tax time, you will need to refer to Form 5000 – Schedule 8 (CPP Contributions on Self-Employment and Other Earnings to calculate your annual contributions. Quebec residents should use Form 5005 – Schedule 8 – Quebec Pension Plan Contributions.
Please note if you are still unsure of the amount you should be contributing to your CPP, we recommend contacting a professional tax accountant in Toronto.
Benefits of CPP Contributions for Small Business Owners or Self-Employed in Canada
Contributing to the CPP has several advantages for self-employed individuals. First and foremost, it helps build a foundation for your retirement income. By making regular CPP contributions, you are securing a portion of your income for your retirement years. Additionally, contributing to the CPP has several benefits:
- Tax deduction: When you complete your tax return, you can claim a deduction for the "employer half" of the CPP contribution. This deduction can help reduce your overall taxable income.
- Federal tax credit: You are also eligible for a 15% federal tax credit for the "employee half" of the CPP contribution. This credit further reduces your tax liability.
Other Options for CPP
Self-employed individuals have some flexibility when it comes to CPP contributions. Here are some alternatives to consider:
- Incorporation: If you're a sole proprietor, incorporating your business provides the option to pay yourself a salary or dividends. By paying yourself a lower salary and taking the remaining income as dividends, you can reduce your CPP premiums.
- Pension plans: Incorporated individuals can participate in pension plans, allowing them to save for retirement while potentially reducing CPP premiums. However, it's important to note that sole proprietors do not have these options and must pay CPP premiums based on their net self-employment income.
- Alternative investments: Consider taking out a dividend or T4 income annually to max out your TFSA (tax-free savings account), and then use the TFSA as a replacement for your CPP. Another option is to use a corporate-owned insurance policy to grow cash value on a tax-sheltered basis.
It's essential to evaluate these alternatives based on your business structure, financial goals, and long-term plans.
Can You Opt-Out of CPP if Self-Employed?
No, as a self-employed individual in Canada, you cannot opt out of the Canada Pension Plan (CPP). The CPP is a mandatory national pension plan designed to provide income support to Canadians in retirement or upon disability. Both employees and self-employed individuals are required to contribute to the CPP, subject to certain exemptions and rules.
Conclusion
It's important for small business owners and self-employed individuals in Canada to understand their CPP obligations, including contribution rates, reporting requirements, and deadlines. Consulting with a professional accountant in Toronto can provide personalized guidance based on individual circumstances and ensure compliance with CPP regulations.
Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.