There are many issues to consider when contemplating the decision to become self-employed. Your access to government programs, including Canada Pension Plan (CPP) and Employment Insurance (EI), are important considerations for anyone moving to a self-employment structure. Let’s take a quick look at both CPP and EI, and highlight the key differences for employees and self-employed individuals.
Canada Pension Plan (CPP) – Basics
The CPP is a universal program, intended primarily to provide workers with a modest retirement income. In addition to a retirement pension, the CPP also provides auxiliary benefits such as disability benefits, death benefits, survivor’s benefits, and children’s benefits.
The CPP is a contributory plan, and is funded through contributions from employers, employees, and self-employed individuals. Also, participation in the CPP is mandatory for almost all Canadians. With the exception of Quebec residents who are members of the QPP – Quebec Pension Plan, most working Canadians, including those who are self-employed, are required to contribute to the CPP.
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. Essentially, your CPP retirement benefit is determined by how much, and for how long, you have contributed. In general, the more you contribute, the higher your benefit in retirement.
As an aside, it’s important to note the substantial difference between the maximum CPP retirement pension, and the average amount actually received. According to the Government of Canada, for the 2020 year, the maximum monthly amount at age 65 was $1,175.83. However, the average monthly amount is only $710.41.
Canada Pension Plan (CPP) – Key Differences for Self-Employed
For the CPP, the key difference for self-employed individuals is the contribution rate (and corresponding contribution amount). For employees, both the employee and the employer must make mandatory CPP contributions. However, self-employed individuals must contribute both the employer and the employee portions.
For the current 2021 year, employee and employer CPP contribution rates are 5.45%. Therefore, the self-employed contribution rate is currently twice that amount, at 10.9%. Further, contribution rates will be increasing next year. In 2022, the CPP contribution rate will be 5.7% for employers and employees, or double that amount, 11.4%, for those who are self-employed.
In terms of dollars and cents, rather than percentage figures, in 2021, all self-employed individuals who make more than $61,900 must now contribute a total of $6,365.60 to the CPP. That’s not a trivial amount. On the other hand, the maximum amount an employee is required to contribute to CPP in 2021 is $3,182.80.
Employment Insurance (EI) – Basics
Employment Insurance (EI) is a federal Government of Canada program intended to provide income benefits to individuals who have lost their income due to becoming unemployed, taking maternity or paternity leave, caring for a critically ill person, or cannot continue working due to illness.
For almost all employees in Canada who are in a traditional employer-employee relationship, participation in the EI program is mandatory, and both the employer and the employee must pay EI premiums.
Employment Insurance (EI) – Key Differences for Self-Employed
Unlike CPP, the EI program is generally unavailable to those who are self-employed. The Employment Insurance Act outlines several situations where an individual does not have insurable employment for the purposes of EI coverage. In general, this includes self-employed individuals, and those who work for a company and also own more than 40% of the voting shares of that company.
Despite this restriction, self-employed individuals do have the option of participating in a portion of the EI program. Under certain circumstances, self-employed individuals who choose to participate, may be eligible for EI special benefits – maternity, parental, sickness, and compassionate care benefits. However, self-employed individuals are not eligible for regular (unemployment) EI benefits.
In 2021, the contribution rate for Employment Insurance is $1.58 in EI premiums for every $100 earned, up to $56,300. This contribution rate is the same for employees and self-employed individuals. In other words, in 2021, a self-employed individual who chooses to participate in the EI program can contribute up to a maximum of $889.54 in EI premiums.
Also unlike CPP, self-employed individuals who choose to participate in the EI special benefits program are not required to pay the employer’s portion of the EI premium.
Bottom Line
There are many different factors to consider when contemplating a move from employee to self-employed – pension, savings and investment, insurance and group benefits, and CPP and EI, just to name a few. If you have any questions about your retirement plans, or would like to have a discussion with a Portfolio Manager or Certified Financial Planner, just contact us.
