Electing to Pay into the Canada Pension Plan.
THE CANADA PENSION PLAN HAS recently been in the news as the Government of Canada has announced plans to protect its viability into the next century. To that end we can expect to see contribution limits rise steadily as the "baby boomers" approach retirement age over the next fifteen to twenty years.
Most employees and self-employed persons are required to contribute to the Canada Pension Plan or the Quebec Pension Plan. If you are an employee, contributions are withheld from your weekly pay-cheque and remitted to the government along with a matching amount from your employer. For the 2000 taxation year, pensionable earnings start at $3,500 per annum and reach a maximum at $34,100. The amount of contribution is set at 3.9% of the employees pensionable earnings to a maximum of$1,329.90.
If you are self-employed for all or part of the year, you are effectively responsible for the employees portion of the Canada Pension Plan contribution as well as the matching component demanded from the employer. The above amounts are thereby doubled and the maximum payment required of a self-employed taxpayer earning more than $37,600 is $2,659.80.
There are certain types of employment income that a taxpayer may earn that qualify for inclusion as pensionable earnings in the year but are not subject to withholding at source by the employer. The most common of these are tips and gratuities received in the year.
Restaurant workers, for example, regularly receive tips from patrons of the establishments where they are employed. The workers may receive an hourly wage that is subject to withholding by the owners of the restaurant. Any tips earned by the employee are received directly from the patrons and do not find themselves onto a T4 slip at the end of the year.
The employee has an opportunity to declare the receipt of such amounts and pay the required taxes by indicating the amount he has received in the year on line 104 of the personal income tax return. However, he must be careful that such "other employment income" comes into the calculation of pensionable earnings for the year. If he is not, he will lose out on an opportunity to increase his Canada Pension Plan contributions and provide toward a larger pension once he reaches retirement age.
To correct this problem, the taxpayer may elect under subsection 13(3) of the Canada Pension Plan to complete form CPT2O and have his earnings count as pensionable for the year. One copy of this election must be submitted with his income tax return for the year and tax-payers have until April 30 of the second year following the receipt of such income to file the appropriate election.
Although tips and gratuities are the most common sources of income that fall into the above situation, there are other types of income that qualify as well. These include: (a) employees working outside Canada by a Canadian employer, including the Federal Government, who has not agreed to cover the employment; (b) employees who have worked less than twenty five days for cash remuneration in agriculture, fishing, hunting, forestry or logging; (c) employees of a casual nature, (d) employees of an international organization or by the Government of another country working in Canada who have not agreed to cover the employment; and (e) Registered Indians or persons entitled to be registered as an Indian under the Indian Act who are employed in Canada by an employer located on a Reserve who have not undertaken to cover the employment.
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