Receiving Pension as A Self-Employed Taxpayer

Many people dream of being self-employed and the freedom it provides. There is a bit of give-and-take however, with that freedom coming at the expense of benefits obtained while working for an employer.  One thing consistent between working for yourself or someone else is that that the Canada Pension Plan (CPP) will require contributions.

As a self-employed taxpayer, your contributions will be due upon completing your tax return. Additionally, you are permitted to purchase and arrange other investments for retirement income.

Even the Self-Employed Must Contribute to the CPP 

According to chartered investment manager and financial management advisor Jeff Stokley, virtually every Canadian earning over $3,500 per year must contribute to the CPP., and that includes the self-employed, who do pay the full amount, as opposed to employees who pay 50- 50 with their employer. A notable exception is Quebec residents, who make contributions to a provincial plan.

Every taxpayer has a CPP account which is based on contributions made from the age of 18 and ending at age 70. Typically, pension payments begin at 65, though they may start as early as age 60.

Calculating Contributions

Contributions to the CPP are determined by a range of income which is adjusted annually based on the country’s average wage date. The lower and upper amounts change almost every year. The CPP contribution rate was 9.9% in 2018, rising to 10.20% in 2019.

As mentioned above, when you are a self-employed worker, you are responsible for the full amount of the contribution, though your self-income contributions are based solely on the net income of your business and does not include income from other sources, including investments.

Overpaying your CPP or earning less than the minimum amount of self-employment income results in funds being repaid to you when your tax return is processed.

Your Tax Return and the CPP 

• Lines 135 to 143 on your tax return are used to report your income.
• In order to calculate your CPP contributions, start at line 1 of Schedule 8. Complete Schedule 8 with all relevant information, calculating your self-employment contributions on line 10. This amount will then be transferred to line 421 of your tax return.
• On line 11 of the schedule you input half the amount form line 10 and this figure is used in your tax return on lines 222 and 310. These are for tax credits and deductions based on CPP contributions
• You may also choose (using schedule 8) to stop your CPP contributions if you are between the ages of 65 and 70. Simply enter the month in which you will stop contributing, so long as it is not prior to the month in which you turn 65.

Finding Your Contributions 

Your pensionable earnings and your contributions are kept in files by the CPP. This includes employment contributions, as well as self-employed ones. You may use this information to help calculate an estimate of your retirement proceeds from the CPP. You may contact Service Canada directly for a copy or go online to your My Service Canada Account.

You may also find tools online provided by Service Canada which will estimate your CPP retirement income. Certain years in which you earned less may be dropped from the calculation, such as years where your earnings were lower due to time spent raising children aged seven years and younger, or those dropped under the general drop-out provision.

These provisions are available even on your self-employed earnings.

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