Will you be entitled to a pension payable throughout your retirement?
Is the Caisse de dépôt et placement du Québec effectively managed so that all pensioners can receive the benefits to which they are entitled?
How does Quebec compare to the other provinces?
Many of these questions were answered in the new pension reform announced by Retraite Québec (RQ). The government of Quebec has decided to harmonize its pension plan to bring it in line with the plan that will be offered in the other provinces of Canada. This is good news for all taxpayers, but you must still determine how the increase will affect your retirement plan.
A desire for equity and stability
Since it came into force in 1966, no updates have been made to the Quebec Pension Plan, apart from several contribution increases. The last increase was made in 2011, to ensure the Plan’s long-term sustainability.
In 2017, the government of Quebec finally unveiled major changes. To ensure intergenerational equity and to improve the long-term financial stability of the Quebec Pension Plan, Quebec Finance Minister Carlos Leitao announced an increase in pension benefits which will see the income replacement rate rise from 25% to 33.33%.
Whereas today a person 65 years of age can receive a maximum pension of $13,610 per year, with the proposed changes, a person of the same age will be able to receive up to $20,685 per year, a potential increase of more than 50%.
Higher benefits = higher contributions
Unfortunately, this increase in pension benefits cannot be done without increasing the contributions to the Plan. They will rise from 10.8% to 12.8% of earned income up to the maximum pensionable earnings (MPE), which are $55,900 in 2018.
This increase will be done gradually from 2019 to 2025. Whereas today the maximum annual contribution for an employee is $2,829.60, in 2025, this contribution could reach $3,666.64, an increase of close to 30%. In the case of self-employed workers, the increase will be even greater, because the contribution amounts will have to be doubled.
Coming into force of the new benefits scheme
Should you wait until 2019 to retire in order to obtain more generous benefits? Unfortunately for those who are hoping for an immediate increase, the decision to retire should not be based on the RQ announcement.
The rise in contributions will begin in 2019 and only the years worked from that point forward will benefit from the increase. Only persons born in the early 2000s who start to contribute to the Quebec Pension Plan in 2025 or after will be able to obtain the maximum pension benefit.
Incorporation: salary or dividend?
Will it be more profitable for incorporated professionals to pay themselves a salary or a dividend? Each individual situation must obviously be analyzed. However, the new provisions of the Quebec Pension Plan will have to be considered and the contribution and benefit increases taken into account. Many professionals could be attracted by the increased pension benefits and opt for salary compensation.
Under the new rules, here is how pension benefits could be calculated. Take the example of a 45-year-old employee whose employment income has been higher than the MPE since he joined the work force at age 25 and who plans to retire at age 65.
He would receive pension benefits according to the current rules for the first 20 years of employment, and higher benefits, calculated according to the new rules, for the following 20 years.
The table below summarizes the results based on 2018 data:
|Contribution year||MPE in 2018 ($55,900)|
(in 2018 dollars)
(in 2018 dollars)
|Contributions from age 25 to age 45 under the current plan (benefits already acquired)||$6,805||$567.08|
|Contributions from age 45 to age 65 under the new plan (projected benefits)*||$9,556||$796.30|
|Cumulative benefits receivable||$16,361||$1,363.39|
* Assuming a gradual increase in benefits between 2019 and 2025.
The enhancement of the Quebec Pension Plan is excellent news for all taxpayers and for professionals. For many, the changes will not be sufficient to fully cover their financial needs in retirement.
However, you must bear in mind that the government pension should not be regarded as your only source of retirement income, but rather as an additional source, along with your Old Age Security (OAS) benefits, your RRSP, your TFSA or your savings accumulated in a corporation. Your QPP benefits, combined with other sources of income and savings, allow for better diversification of your financial resources and make it easier to achieve your goals.
To understand the impact of the QPP changes on your financial situation, you should consider updating your retirement plan with your advisor and verify the sources of income that will be available to you. Don’t hesitate to call upon our expertise!
Benoit Chaurette, M. Fisc., Fin. Pl.
Tax Specialist and Financial Planner, Professional Practice
With the collaboration of Yannick Tanguay, B.A.A., CIM®, FCSI®, Fin. Pl.
Financial Planner, Professional Practice