How will cashing in stock options affect CPP contributions?

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By Julie Cazzin with Andrew Dobson

Q: I retired in July 2022 and was lucky sufficient to have numerous inventory choices and shares from the corporate I retired from, however they weren’t liquid at the moment. I had as much as one 12 months to promote them. The corporate went public early in 2023, so I used to be capable of promote all of the shares and choices within the first and second quarters. My understanding is that this will likely be deemed employment revenue for 2023, so I must pay each the worker and employer portion of Canada Pension Plan (CPP).

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I’m questioning if it is sensible to start out amassing CPP earlier than 2023 ends and can that keep away from or scale back having to make these CPP contributions? Service Canada reveals that I’ll obtain most CPP advantages. Since I will likely be 61 shortly, I do know the funds will likely be diminished by about 25 per cent. I’m good with that as I will likely be managing my registered retirement financial savings plan (RRSP) withdrawals as much as the age of 71 to maximise Outdated Age Safety (OAS) and CPP together with the defined-benefit pension I’m additionally lucky sufficient to have. — Ron

FP Solutions: It sounds such as you lucked out, Ron, by having the ability to train your inventory choices after you retired. Some corporations have comparatively quick, accelerated expiry intervals of 90 days. Different corporations might permit a retiree to maintain their unique expiry date, usually 10 years from the choice grant date, topic to sure circumstances.

As you be aware, inventory choice proceeds are thought-about employment revenue. Inventory choices profit from special tax treatment on condition that solely 50 per cent is taxable as much as sure limits, so they’re taxed like a capital acquire. However the revenue is reported as employment revenue.

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Employment revenue is usually “pensionable” and topic to CPP contributions, particularly when you find yourself beneath age 65. Aside from non-public firm shares, inventory choice revenue must be handled at supply with payroll deductions corresponding to revenue tax and CPP contributions. So, given these have been publicly traded shares, Ron, you most likely had CPP contributions deducted from the proceeds.

As an worker, your employer would have paid the employer CPP contributions, and you’ll have paid the worker CPP contributions. For 2023, that may have been $3,754.45 every if the choice proceeds exceeded $66,600. In consequence, you can’t choose out of paying these contributions.

As soon as an worker is 65, they are able to choose out of CPP contributions. However at your present age of 61, Ron, and based mostly on the character of the revenue, CPP is a requirement, not an choice.

Whether or not you begin your CPP earlier than the tip of the 12 months or not will make no distinction. The timing of your CPP must be depending on different elements, particularly your life expectancy.

When you have well being points or a household well being historical past that would result in a shorter-than-average life expectancy, you ought to be extra motivated to start out CPP. In case your well being is nice or you may have an extended household historical past of dwelling to a ripe previous age, there could also be a profit to contemplating CPP deferral. CPP may be deferred as late as age 70.

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The later you defer CPP, the extra your month-to-month funds will likely be. You might want to attend longer to get the revenue and draw down your RRSPs within the meantime, however if you happen to reside effectively into your 80s, it’s possible you’ll be higher off ready and receiving increased CPP funds.

You should have an analogous timing choice to make with OAS at age 65. It may well begin at 65, however deferring it to as late as age 70 and getting an elevated month-to-month cost is an choice.

You talked about you may have a DB pension. If you have already got a comparatively excessive DB pension, that will present good longevity safety if you happen to reside an extended life. In case you are on the fence about CPP, the upper your DB pension is, the extra useful it could be to contemplate beginning CPP early. In case your DB pension is small, or for another person with little to no DB pension revenue, CPP deferral is that significantly better to contemplate in case you are wholesome.

Retirement funding requires planning, so it’s good to take the time to determine the timing of pensions and the timing and magnitude of withdrawals out of your numerous accounts. It could enable you to enhance your retirement revenue, pay much less tax sooner or later or maximize your property.

Andrew Dobson is a fee-only, advice-only licensed monetary planner (CFP) and chartered funding supervisor (CIM) at Objective Financial Partners Inc. in London, Ont. He doesn’t promote any monetary merchandise in anyway. He may be reached at [email protected] .

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