Personal Finance

Can one opt-out of CPP (Canada Pension Plan) from Taxes?

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  • Feb 24th, 2010 7:45 pm
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Deal Fanatic
Feb 1, 2006
9099 posts
216 upvotes
As for the OP, the reason you can't opt out is that if you could, most people would. The average joe would rather blow their money on trinkets and shiny things now than save it for tomorrow, even if they'd be better off with the latter option. The CPP, then, is a tool to protect future taxpayers from the burden of these people later in life, when they are no longer able to work, but now have no savings. Society says it's immoral to let these short-sighted folks live on cat food, shivering in the dark, in their elderly years, even if it was their own doing that got them there.
Deal Expert
User avatar
Dec 11, 2005
18564 posts
1009 upvotes
asdfvcx wrote:
Jun 18th, 2007 1:10 am
If you run the numbers, the benefits aren't that horrible (although, you do have to fudge the numbers a bit :) ). They're by no means great, but the benefits are not as horrible as some of you seem to think.

Right now the max amount an employee pays is just under $2000/year. Let's pretend it will only go up by the amount of inflation. The max benefit is $860 a month (indexed), or just over $10k/year (I believe this is fully indexed, not partially, but am not positive.)

If we look at a scenario where you invest the money yourself:
  • Real (indexed to inflation) contributions of $2K/year
  • 40 years total
  • Assume Real growth of 5%
  • Grand total: $267K
  • Assume standard Real safe withdrawal rate of 4%
  • This gives you: $10.5K/year
So, if you are only dealing with the standard employee contribution, then the return you are getting in retirement is quite reasonable.


Of course, one of the big pieces of fudging is that I'm totally ignoring the employer contributions. But unless you're self-employed, do many people give a lot of thought to the employer half of the contributions? Seriously, when most people are complaining about how large the CPP deduction is, how many of them are giving even a second of thought to the employer portion (or are even aware of it)?

Now, once you add the employer contributions the returns look quite bad, but the mandate of the CPP doesn't allow it to invest in a way that lets it even come close to a 5% real return.

So, if you could invest both your and your employer contribution and knew what you were doing, you should do better than what the CPP pays. But, much too many people don't have a clue what they're doing, and to preserve some semblance of social order, a plan like the CPP is always going to be required in a modern society.
IMO there is another benefit here - it's backed by the government.

This is something that is hard to quantify in monetary terms, but if I was an investor, it is a huge comfort to me. In fact I would likely contribute EXTRA to my CPP and forego my RRSP, in return for higher monthly payments when I retire, if such a thing was allowed.

Why would I do that when my rate of return may be lower? Because it is backed by the government. The odds of CPP "being outright cancelled" like some people say in here are extremely low. It would be absolute political suicide for any government in power to do that, especially with the top-heavy population demographics we're in now.

If anything, the opposite would happen. If all investments the CPP were involved in collapsed, or if there was another depression, the government would still have to pay it out. You can't say this about most other investments.
Newbie
Mar 10, 2007
93 posts
engo wrote:
Jun 18th, 2007 12:54 am
This option is not available for OP as EPSP is usually used/setup for the benefit of owner/shareholder of the company.
Exactly my point.
Newbie
Mar 10, 2007
93 posts
knapper wrote:
Jun 18th, 2007 5:28 am
May not come off you cheque, but you pay in the end come tax time. The government gets it's money. And I am pretty sure you pay more because you have to pay the employer's portion also.
Actually, no. These earnings are not CPP-assessable.
Deal Addict
User avatar
Jun 22, 2004
1755 posts
114 upvotes
Rocky Mountains wrote:
Jun 18th, 2007 11:08 am
Actually, no. These earnings are not CPP-assessable.
You don't pay CPP though taxes under an EPSP? Or you don't pay more? I have not been an 'employee' at my firm for a number of years, where may earnings are based on profit sharing, and I can guarantee that I pay CPP on my taxes...
Deal Addict
Dec 28, 2006
2374 posts
53 upvotes
Saskatoon
knapper wrote:
Jun 18th, 2007 4:48 pm
You don't pay CPP though taxes under an EPSP? Or you don't pay more? I have not been an 'employee' at my firm for a number of years, where may earnings are based on profit sharing, and I can guarantee that I pay CPP on my taxes...

You don't "pay CPP on your taxes", you pay CPP on your "pensionable earnings".

EPSP are not pensionable or insurable.

http://www.cra-arc.gc.ca/tax/business/t ... art-e.html
Deal Addict
User avatar
Jun 22, 2004
1755 posts
114 upvotes
ghostryder wrote:
Jun 18th, 2007 5:32 pm
You don't "pay CPP on your taxes", you pay CPP on your "pensionable earnings".

EPSP are not pensionable or insurable.

http://www.cra-arc.gc.ca/tax/business/t ... art-e.html
I guess my partnership is not an EPSP then. I may not "pay CPP on my taxes", but I do "pay CPP along with my taxes". Your link shows that CPP and EI should not be deducted from self-employed earnings, just like taxes are not deducted. However, (at least in my situation) it is still the self-employed person's responsibility to pay CPP and tax on those earnings. I would agree that my earnings are not insurable as I do not pay or qualify for EI.
Deal Addict
User avatar
Nov 3, 2006
3390 posts
71 upvotes
Mississauga
Another good thing about the CPP system in Canada is the fact that it is set up as an arms length investment board separate from the government books.
See http://www.hrsdc.gc.ca/en/isp/cpp/cppinfo.shtml#26
and http://www.cppib.ca/About_Us/

I also read that any amendments can only be passed with the approval of 2/3 of the provinces and 2/3 of the population, much like changes to the constitution. So, it would be more difficult for some guy to take a chunk from the CPP and give it to a Quebec ad firm ;)

Oh, I just checked their website, and apparently they have 64.8% equity in their portfolio. They're more aggressive than i expected
Newbie
Mar 10, 2007
93 posts
knapper wrote:
Jun 19th, 2007 8:35 am
I guess my partnership is not an EPSP then. I may not "pay CPP on my taxes", but I do "pay CPP along with my taxes". Your link shows that CPP and EI should not be deducted from self-employed earnings, just like taxes are not deducted. However, (at least in my situation) it is still the self-employed person's responsibility to pay CPP and tax on those earnings. I would agree that my earnings are not insurable as I do not pay or qualify for EI.
A partnership does not qualify as or for an EPSP. The EPSP is set up to benefit certain employees of a corporation only.
Deal Addict
Oct 1, 2004
2574 posts
131 upvotes
Toronto
1. do we get interest on our CPP payments?
2. if they adjust inflation do we see it? or is it done when we start taking it out?

because for the past 5years, my yearly summary shows the same amount :confused:
Newbie
Feb 22, 2010
1 posts
Canada
CPP is one of the great ways that the government keeps our wealth locked away from us. 5% growth over 40 years is dismal when compared to historical averages of a well diversified portfolio. Regardless, there are many, MANY reasons why CPP is not good for Canadians who can save for themselves. Here I will illustrate a few of them:

1) Employer Contributions
I am 27 and earn $36,000/year and pay $1,651 to CPP, which my employer has to pay as well. If my employer did not have this expense to employ me they could pay me an additional $1,651 instead of paying to CPP. So effectively the employer contribution I am really making myself. Therefore I am paying $3,303.56 into this ponzi scheme.

2) Reduced Growth
Using the following calculator: http://www.cortrustbank.com/FinancialTo ... ulator.cfm

...I have run 5% and 7% average annual returns over 38 years to take me to age 65.

7% annual growth on $3303.56/yr contributions gives $672,809.89 at age 65.
5% annual growth on $3303.56/yr contributions gives $397,496.47 at age 65

3) Reduced Income
Running the following illustration for 7% and 5% annual growth, then conservatively using 5% annual growth in the years where I am actually drawing income from this plan would give me annual incomes of $33,640/yr and $19,874.80 respectfully. At these income levels I never touch my principal. Compared with CPP that is 2-3 times greater income, depending on your growth assumption.

***Keep in mind that this is assuming that we will never touch our accumulated capital. In reality CPP does not hold an estate value (unless you have a spouse who gets a meager widow pension if you predecease them) so theoretically I should be able to draw down my capital annually toward my life expectancy OR purchase an annuity that will give me a much higher yield than 5% in retirement (Let's compare apples to apples here).***

a) I retire at age 65 and draw as much incoe from my $672,800 (still getting 5% ave growth) as possible for 30 years till I am 95 and I could draw over $43,000/year till I was out of money. If I died before I was 95 anything left would go to my beneficiaries.

b) A single life straight prescribed annuity for $672,800 would easily give me over $50,000 annual income tax-preferred.

4) More Restrictions
Being forced to pay into CPP means I cannot access this program until I am 60-65, even if I need the income sooner due to successful early retirement.

5) No Estate Value
CPP has litte to no estate value, meaning that my children and grandchildren, who could have benefitted from my $672,800 for many years into the future (Assuming I just lived on the income it could provide) will now have to live in poverty and start from near scratch as I had to because the Government stole their trust fund by making me put it into their CPP Ponzi scheme.

If Canadians insisted that the Government that we elect allow us to manage our own lives and insisted that our schools teach children financial management from an early age, then we would be much better off as a Nation. Period. There is so much wealth in this country but your government holds it in trust from you for your whole life and then doesn't pass it on to your desired heirs. But hey, this shouldn't bother you if they never tell you this. I could go on forever but if I can find a way to opt out of this program and stop having the government wipe my bumb for me I would do it in a heartbeat.
Sr. Member
May 29, 2006
540 posts
101 upvotes
Bullseye wrote:
Jun 18th, 2007 7:58 am
As for the OP, the reason you can't opt out is that if you could, most people would. The average joe would rather blow their money on trinkets and shiny things now than save it for tomorrow, even if they'd be better off with the latter option. The CPP, then, is a tool to protect future taxpayers from the burden of these people later in life, when they are no longer able to work, but now have no savings. Society says it's immoral to let these short-sighted folks live on cat food, shivering in the dark, in their elderly years, even if it was their own doing that got them there.
Good points, hit the nail on the head IMO !
Banned
Jan 11, 2004
19816 posts
554 upvotes
cheech99 wrote:
Feb 23rd, 2010 3:36 pm
CPP is one of the great ways that the government keeps our wealth locked away from us. 5% growth over 40 years is dismal when compared to historical averages of a well diversified portfolio. Regardless, there are many, MANY reasons why CPP is not good for Canadians who can save for themselves. Here I will illustrate a few of them:

1) Employer Contributions
I am 27 and earn $36,000/year and pay $1,651 to CPP, which my employer has to pay as well. If my employer did not have this expense to employ me they could pay me an additional $1,651 instead of paying to CPP. So effectively the employer contribution I am really making myself. Therefore I am paying $3,303.56 into this ponzi scheme.

2) Reduced Growth
Using the following calculator: http://www.cortrustbank.com/FinancialTo ... ulator.cfm

...I have run 5% and 7% average annual returns over 38 years to take me to age 65.

7% annual growth on $3303.56/yr contributions gives $672,809.89 at age 65.
5% annual growth on $3303.56/yr contributions gives $397,496.47 at age 65

3) Reduced Income
Running the following illustration for 7% and 5% annual growth, then conservatively using 5% annual growth in the years where I am actually drawing income from this plan would give me annual incomes of $33,640/yr and $19,874.80 respectfully. At these income levels I never touch my principal. Compared with CPP that is 2-3 times greater income, depending on your growth assumption.

***Keep in mind that this is assuming that we will never touch our accumulated capital. In reality CPP does not hold an estate value (unless you have a spouse who gets a meager widow pension if you predecease them) so theoretically I should be able to draw down my capital annually toward my life expectancy OR purchase an annuity that will give me a much higher yield than 5% in retirement (Let's compare apples to apples here).***

a) I retire at age 65 and draw as much incoe from my $672,800 (still getting 5% ave growth) as possible for 30 years till I am 95 and I could draw over $43,000/year till I was out of money. If I died before I was 95 anything left would go to my beneficiaries.

b) A single life straight prescribed annuity for $672,800 would easily give me over $50,000 annual income tax-preferred.

4) More Restrictions
Being forced to pay into CPP means I cannot access this program until I am 60-65, even if I need the income sooner due to successful early retirement.

5) No Estate Value
CPP has litte to no estate value, meaning that my children and grandchildren, who could have benefitted from my $672,800 for many years into the future (Assuming I just lived on the income it could provide) will now have to live in poverty and start from near scratch as I had to because the Government stole their trust fund by making me put it into their CPP Ponzi scheme.

If Canadians insisted that the Government that we elect allow us to manage our own lives and insisted that our schools teach children financial management from an early age, then we would be much better off as a Nation. Period. There is so much wealth in this country but your government holds it in trust from you for your whole life and then doesn't pass it on to your desired heirs. But hey, this shouldn't bother you if they never tell you this. I could go on forever but if I can find a way to opt out of this program and stop having the government wipe my bumb for me I would do it in a heartbeat.
its easy..just immigrate somewhere and declare non residency. its very easy to opt out
Deal Fanatic
Oct 13, 2002
5372 posts
226 upvotes
Calgary
do you still have to pay CPP as a freelancer (ie no deductions off your cheques)?

also is it possible to transfer your QPP (quebec pension) to the regular CPP or would you just collect both when you retire? (i moved and wont be back to live in quebec)
Deal Fanatic
Feb 1, 2006
9099 posts
216 upvotes
Cheech - you must be really upset about this to drag up a nearly three year old post! :cheesygri

A 5% nearly-guaranteed return is actually far from dismal. The long term average of a 100% equities portfolio is around 7%, but that entails lots of risk.

If you did want to opt out (and not leave the country or have no income), the way to do is to become self employed and incorporated, then pay yourself only in dividends, which are not pensionable.

You do make some fair points about the CPP, it's certainly the best solution for every Canadian. What it is, though, is the best solution for MOST Canadians. It's paternalistic, but as I said before, many people would not save the required amount to be able to afford the bare essentials in retirement. Look at RRSP take up rates, and the national average savings rate, abysmal!
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