Subscribe
Share
Share
Embed
The Canada Pension Plan comes off almost every paycheque, but most business owners never stop to ask how it works or what it means for them. In this episode, Wendy Brookhouse and Kelsey MacAulay use the average CPP payment of $925.35 a month as a way in. They explain how contributions work, why the choice between paying yourself salary or dividends has gotten closer than it used to be, when it might make sense to take CPP early or wait, and how your pay structure shows up when you eventually sell your business.
In This Episode
- Understand what CPP is and how the 5.95% contribution works, including why the self-employed pay both halves at 11.9%
- See why the tax gap between paying yourself salary and paying yourself dividends has narrowed, and what that means for your pension and for getting financing
- Weigh the tradeoffs of taking CPP early, which reduces your benefit each month before 65, against waiting, which increases it each month up to 70, and learn where the crossover point lands
- Recognize how your pay structure looks during a sale, when buyers normalize salary and add dividends back into profit
- Find out how to check what you are actually eligible to collect through Service Canada
Creators and Guests
Host
Kelsey MacAulay
When the Black Star team needs something done, they go to Kelsey! Wendy Brookhouse is his wife: when she has a new financial invention, Kelsey builds it and brings it to life - he does the heavy lifting, so you don’t have to!
What is The Number?
The Number is a business podcast about the numbers that actually run your business.
Each episode focuses on one number. Revenue, profit, cash flow, capacity, time, valuation, customer cost, risk, or exit readiness.
Hosted by Wendy Brookhouse, and often joined by Kelsey MacAulay, the show breaks down what that number means, why it matters, and how it should influence the decisions you make as an owner.
Some episodes feature guests. Some are honest conversations. Some are solo deep dives.
If you own a business and want better clarity, better decisions, and better outcomes, it starts with knowing your numbers.
[00:00:00] Wendy: Welcome to The Number. I'm Wendy Brookhouse, Certified financial planner and certified value builder
[00:00:07] Kelsey: And I'm Kelsey McCauley, a certified exit planning advisor
[00:00:11] Wendy: Well, today's number is kind of a strange number. It's not an even number. It's $925.35
[00:00:20] Kelsey: That's an exact number, Wendy. Where's, where's that coming from?
[00:00:23] Wendy: It is the average amount of CPP that people are collecting in Canada right now
[00:00:31] Kelsey: The Canada Pension Plan
[00:00:33] Wendy: Yep, exactly. It's one of those deductions if you're, um, getting a pay, uh, a slip, like you're, you're looking at your slip and you're going, "What came off my pay? Why did I get paid this much and I don't have as much?" This is one of those lines, and that is, uh, 5.95% of your salary comes off, is matched by your employer, and gets sent in to CPP, and it functions as credits later on
[00:01:00] Kelsey: And if you're self-employed, you have to pay both halves, which is 11.9%.
[00:01:05] Wendy: That's exactly right. Unless you're in a cor- yeah, I mean, if you have a corporate e- if you have a corporation, your corporation's paying half, you're paying half, but in essence, you're paying both sides. Yeah
[00:01:17] Kelsey: who don't know, the Canada Pension Plan, it's a mandatory social insurance program here in Canada. It's designed to replace a portion of your income during retirement or a disability or an unfortunate death.
[00:01:30] Wendy: Hmm. Yes. Yeah. There are so many nuances. Sometimes I think we probably could do 10 episodes on it, so let- we'll focus a, on a couple today. Um, but what's also interesting is that... So CPP is run by the Canada Pension Board, and sometimes people always worry about, "Should I take it early?" 'Cause are they gonna run out?
[00:01:52] But I've been to the presentations, and the actuaries say it's in good standing and should last decades at this point. So
[00:02:01] Kelsey: 'Cause there are maximums and stuff too people can get, so, you know, on both sides of, like, the average is number today
[00:02:09] Wendy: Right, and the maximum right now is, uh, 15,07.65. So that would have meant you've basically been earning the maximum or, or contributing the maximum every year. Because we said 5.95%, but it's capped at a certain point. So
[00:02:23] Kelsey: 4,230. $4,230.45
[00:02:27] Wendy: So, and it's calculated based on your salary minus a lower number, uh, 3,500. So really after you've made kind of $74,000, your CPP, you don't have to contribute anymore. So sometimes if you're in a higher earning tax bracket, you'll notice all of a sudden that your paychecks are getting bigger, and that's because you've finished contributing to CPP for the year.
[00:02:48] Kelsey: Excellent
[00:02:49] Wendy: Yeah. Now, um, one of the things when we're doing planning with people, uh, Kelsey, who are, uh, small business owners and may have a corporation and they're kind of, "Hey, how do I best pay myself to minimize my taxes?" And the answer up to a few years ago was, "Hey, pay yourself some dividends." Now, dividends do not, uh, give you any RSP room, and they do not contribute to CPP.
[00:03:15] But what's interesting is a few years ago with some, uh, rule changes that came down from the government, when you start adding up the number of... the total amount of taxes between personal and the corporation, uh, you'll find that the difference in the amount of tax you pay between those two strategies of dividends versus salary has gotten so close, so close.
[00:03:38] So a lot of times now, um, we have business owners taking a salary because if you can, um, get a pension in retirement, w- why not for the same tax burden?
[00:03:51] Kelsey: Yeah, and there's also some benefits to having a salary too when you're trying to get financing and
[00:03:57] Wendy: Right. Yeah. If you're trying to get a mortgage on your house and everything like that, they, the banks really do like a T4 income more than they like the T5 dividend income when they're calculating. They're just a little less, um, persnickety
[00:04:12] Kelsey: Yeah, yeah. That's a little more straightforward for them
[00:04:14] Wendy: Yeah, exactly. Exactly. So CPP, um, it basically, uh, does all those calculations. And if you wanna know how much you're eligible for, you can go to Service Canada and, um, they will actually provide you... Now, there's a rigmarole with, with, uh, passwords, et cetera, but once you get past that part, you can actually find out what your projections are for CPP at age 65 versus 60 versus 70.
[00:04:43] So that's one of the weird things about CPP is you can take it early. And every y- every month you take it early, you lose a percentage of your benefit
[00:04:53] Kelsey: And the standard in early is 65 is the normal time, so anything earlier, and they, they penalize you by the month
[00:05:00] Wendy: Yeah. It can be quite significant. So what I ... Because let's say if you're a self-employed individual, you've been doing really good. You've done RSPs, you've done tax-free savings account, you sold your business, you made a bunch of coin, um, but now you have also your CPP. So should you take it early? Should you take it late?
[00:05:18] And so one of the things to cal- to consider is that this is kind of a guaranteed income stream, and it's indexed, which means as cost of living goes up, the benefit goes up. So that's kind of a thing we think about when we're doing financial planning is if this is the only guaranteed income you'll have, maybe we wait and make it a bigger income source
[00:05:38] Kelsey: So, I mean, you're losing 0.6 of a percent a month if you take it early, so 7.2% a year. Why would someone take it three, four years beforehand knowing that they're losing 20, 30%?
[00:05:52] Wendy: It could be a number of factors in terms of maybe they've retired early and they really do need that income, Kelsey, and so they might decide they want to have that income stream. There may be... Maybe they don't have longevity in their hou- in their, um, family tree, so everyone in their family dies young.
[00:06:10] So they're like, "I'm gonna take it early so I can get at least some of it out of it." Um, the survivor- there is a survivor's benefit, but it's not necessarily huge depending on the situation. So that's a couple of reasons why people might. And, um, it's always interesting 'cause there, there is a crossover point.
[00:06:28] You know? So if you wait... If you take it at 60 or you wait till 65 and get more, but you've been taking it longer, it does cross over at a certain point where it would've been better to wait. And so we actually built a calculator to help people figure that out, um, because, uh, if you wanna play with how long you might live versus whatever you might get, it can really give you an idea of how much extra cash you could get over the long term, because you could get significant amounts more.
[00:06:56] Just a question of whether you need it and whether you want indexed income
[00:07:01] Kelsey: Yeah, 'cause if you wait over 65, you're getting 0.7% a month more
[00:07:06] Wendy: Mm-hmm. Yeah
[00:07:07] Kelsey: to the age of 70. So you'll get another 8.4% every year you wait, which, excuse me, could get you close to that maximum
[00:07:16] Wendy: Right, and so that, that's a lot of calculations, and a lot of people say take it earlier 'cause then they know for sure, because there is always a what if. We don't know how long we're gonna live and how long that's going to be. So you've paid into it, get as much as you can out, versus, hey, if I wait, I might be able to get more out.
[00:07:31] So that's one of the things to think about, and that's why that calculator... We'll put it in the show notes so that people can go in and do their own calculations, which it's kind of fun. Um, but also when it comes to CPP and whether you pay yourself a salary or dividends, it can affect some of the calculations on the value of your business, Kelsey.
[00:07:50] How does that work?
[00:07:51] Kelsey: Absolutely. Yeah, no, I see it a bunch of times. Um, people are on salary, it's a lot cleaner when you're going through because the sale or due diligence, because they say, "Oh, you're paying yourself X, 60 grand, 80 grand, 100 grand." And they look at to replace you, it's a 60, 80, or 100 grand person, so it's like for like.
[00:08:12] But when things are buried into dividends and different little shield or bonuses and stuff to top things off because you forgot that you needed this or that, it gets really a lot more murky to start showing and normalizing those numbers to say like, "What is the true pay of this person?"
[00:08:34] Wendy: And what's the true profit of the company? Because if you are paying yourself dividends, your profit is artificially in- uh, inflated because your, your salary is an expense, your dividend comes out of retained earnings, therefore it looks like you have a higher profit. So then when they're going in to say, "Hey, what's this company really worth?"
[00:08:55] They're just gonna add that back in and take it out of profit
[00:08:58] Kelsey: Yeah. I find that people, uh, they do that and then they're like, "Oh, my EBITDA's a lot higher." And it's like, no, as soon as someone goes through, they're gonna strip that rate out and then they're going to, as I said, normalize it. So I'm not telling people to do it either way, take dividends or take salary.
[00:09:16] But as Wendy mentioned, now within the last few years of those being pretty close to the same, where there used to be a large- larger discrepancy, um, yeah, I would think taking a salary just because banks, other financial institutions, even you know, they're a lot more familiar with the T4 and, and can help you 'cause it's when you try to go into a bank and you show them that, "Oh, I really don't have a salary, but y- I take six digits out," they, they can't follow that. Sa- same as like someone buying it too.
[00:09:56] Wendy: You don't fit in the box, and you gotta fit in the box for the bank. So yeah. So there's a lot of reasons to think that. Sometimes we do a combination plan where I, I look at what are the regular, reliable ex- things you want to spend money on every month, every week, add that up, and that's salary.
[00:10:13] And then the chunky stuff like big vacations or house renovations or other things, we might actually make those a dividend so that you need a big chunk out, that's when you pull that out to pay for those bigger things. Mind you, you should do your tax calculations and make sure you have enough put aside to pay for the taxes on that, 'cause you pull the dollar out of your corporation, you might owe 50 cents in taxes.
[00:10:36] Who knows? Depending on what bracket you're in.
[00:10:40] Kelsey: Yeah, no, there's a lot of, uh, a lot of funkiness with all that
[00:10:43] Wendy: So we've kind of just started pulling back the feature, but the 925.35 average amount for somebody who's been paying into CPP most of their lives. Right now, the maximum is 1507. It is an individual decision for a business owner. If you're an employee, you don't really have any choices. It's coming out of your, out your way no matter what.
[00:11:04] But it is something worth investigating and finding out how much you're eligible for
[00:11:11] Kelsey: Totally agree
[00:11:12] Wendy: Awesome. We'll come back next time on The Number when we reveal the secrets behind another one. Thanks
[00:11:19] Kelsey: you