Do the self-employed opt out of the Canada Pension Plan?

In 2017, anyone with earnings was required to pay $4.95 in Canada Pension Plan contributions for every $100 of earnings (up to a maximum earnings threshold of $51,800 - rates here). For the employed, their $4.95 CPP/QPP contribution was matched by an equal contribution by their employer. However self-employed individuals are required to pay the entire employer+employee contribution themselves, amounting to $9.90 for every $100 of earnings.

Now the self-employed have an out. They can incorporate, and pay themselves in dividends rather than salary. Since they are not required to pay CPP premiums on dividends, they can potentially avoid paying into the Canada Pension Plan. 

But do they?

There are both advantages and disadvantages of opting out of CPP - sure, you don't have to pay CPP premiums, but you don't get CPP benefits either. And CPP offers some attractive benefits, for example, it provides disability insurance, and is inflation protected. Moreover, there are other reasons why the self-employed might not want to minimize their employment income. Registered retirement savings plan contribution room is tied to employment income, and financial institutions may ask for proof of employment income before they will issue a mortgage. So ultimately it's an empirical question - do the self-employed opt out of the CPP, or don't they?

To some extent, this question can be answered with the Canada Revenue Agency's Income Taxation Statistics:

The above table shows average CPP or QPP premiums paid per taxfiler. The taxfilers are categorized according to their main source of income. So, for example, the "Employment" category includes all taxfilers whose main source of income was employment, even if those individuals had some self-employment income. Some groups of people, such as individuals whose main source of income was pension income, have been excluded. 

It does seem that individuals with professional income pay quite a bit less in Canada Pension Plan contributions than one would expect based on the total income assessed per tax filer. However there just aren't that many of those tax filers. The typical self-employed person is not a doctor or a lawyer or other professional. They're a small business owner or gig economy worker - someone with proprietorship or partnership income - and they're paying CPP contributions at a somewhat lower, but not massively lower, rate than employed individuals. (They're also, in many cases, supplementing their self-employment income with employment income, and pay into the CPP both as an employee and as a self-employed individual). Now it could be that these small business owners are working for cash, or making highly aggressive use of home office and other deductions, and that their total assessed income understates their actual income. But that's another matter entirely.

The big question, however, is how many of those taxpayers whose primary source of income is "investment" are self-employed individuals paying themselves in dividends? It's impossible to answer this question directly with the aggregate CRA data. However we can get at the issue directly by using information about the Canadian labour force. According to Statistics Canada Labour Force Survey data, there were 15.8 million employed workers in Canada - a number that almost exactly matches the number in the table above - and 2.9 million self-employed (here). Even if we add the 182,750 people with fishing and farming income to the ranks of the self-employed in the table above, there are still a significant number of self-employed individuals unaccounted for. That suggests there are indeed a significant number of self-employed individuals - possibly over a million taxpayers - who are not appearing as professionals, proprietors, and so on, and not making significant CPP contributions.

 

Click here to download Self employed cpp calculations

Comments

[Tammy Schirle]

Interesting to think about, thanks Frances. I'd be curious whether the self-employed take any time working through drop-out provisions. Allowing child-rearing drop-outs and the general drop-out of 17% of lowest earnings months can substantially alter CPP benefits. Some could decide on how many "zeros" to leave in their earnings history?

[Frances Woolley]

Excellent point. I'm thinking this would be quite an interesting question to investigate with the LAD - that's the only way to get at the issue you raise, I think.