Retirement for the Self Employed
Hello All,
Given the impending RRSP contribution deadline, my focus tends to be on retirement at this time of year (as is evident from previous newsletters in late January :)). This is an important topic for everyone, but it can be especially challenging for small business owners and self-employed individuals.
Unlike employees, business owners don’t receive consistent cash flow in the form of a salary nor do they have the safety net of an employer-sponsored pension plan. Excess profits are often reinvested in the business or simply accumulate in a bank account while you attend to more pressing matters. This is why having a some sort of retirement plan is essential.
There are two key sources of retirement income available to Canadian small business owners: the Canada Pension Plan (CPP or QPP in Quebec) and Registered Retirement Savings Plans (RRSPs).
(There is also Old Age Security, but this is automatic at retirement)
Canada (Quebec) Pension Plan(CPP or QPP)
The CPP is a government-administered program that essentially provides a basic level of retirement income. Contributions are mandatory.
If you are an employee or owner manager of a corporation that receives a paycheque, you will contribute roughly 6% of your gross pay (up to a maximum salary amount of approximately $80k) while your employer/corporation contributes an equal amount.
If you are self employed, since you don't have an employer, you must contribute twice the amount of an employee or about 12% . The maximum salary amount is the same.
While this may seem like a significant amount, the advantage of mandatory contributions is that you are guaranteed to receive a pension upon retirement.
Currently, the maximum CPP benefit (for 2025) is projected to be $1,356.60 per month, but most Canadians receive less, with the average around $770 per month.
Note that this is indexed to inflation and will increase each year.
The amount that you receive depends on how much you have paid into the plan which is directly proportional to your earnings and how many years you have contributed.
Registered Retirement Savings Plans (RRSPs)
While CPP provides a foundation, it’s often not enough for a comfortable retirement. Consequently, if you do not have another type of pension plan or a nest egg, it is important to have RRSPs.
An RRSP, for those of you who don't know, is a tax-deferred savings account that allows you to set aside money for retirement. The benefit and incentive of RRSPs is that contributions, up to a maximum limit, reduce your taxes payable in the year that you contribute.
To contribute, you would set up an RRSP account with your bank or a brokerage and invest your contributions. These investments will then grow over time.
As an incentive to start as soon as possible (although it is important to remember that it is never too late) consider this example:
If you contribute $500/month to an RRSP starting at age 35, assuming a 6% annual return, you’ll save approximately $500,000 by age 65.
If you start at age 45, the same contribution grows to just $250,000.
The maximum amount you can contribute in any given year is the total of:
18% of the previous year's earned income (this can be found on your notice of assessment for last year)
Plus
Any unused contribution room from previous years (also on your notice of assessment)
Since RRSPs reduce your taxable income, the benefit is greater when you have higher levels of income that are subject to a higher tax rate.
While you can withdraw from most RRSPs anytime, you will have to pay tax (at your current tax rates) if done before retirement and you lose the contribution room. So, while early withdrawal is an option, it is not recommended.
Once you do retire, you would convert your RRSP to a RRIF and are required to withdraw a minimum amount each year. The amount that you take out is then taxable.
Steps to Start Saving
Like with anything difficult, it is helpful to build a habit around saving.
You can use an online retirement calculator to determine how much you’ll need to save, based on how much income you would want in retirement.
Once you know how much you want, you can work backwards (using an online calculator and some assumptions) to determine how much you need to save monthly or annually.
Create an entry in your calendar to remind yourself to contribute or automate withdrawal of a monthly amount from your bank account.
Make sure your underlying investments are consistent with your long term goals by speaking with an advisor at your bank/brokerage or a financial planner.
If you feel stressed about whether you’re saving enough for retirement, you’re not alone—this is a common sentiment among many Canadians. The good news is that it isn't that hard to assess your situation and make small, consistent efforts towards building a comfortable retirement.
Let me know what you think by replying to this email.
Wishing everyone an excellent weekend!
Ronika
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Links of Interest
Small Business Tips for 2025: A list of useful business tips from Shopify.
Carbon rebate - what you need to know: Further to a question from a reader about accounting for carbon rebates, I thought I'd share this article.
How to potential tariff war might affect Canadians: It seems that this will result in higher prices for Canadian consumers and disruptions in key sectors such as energy and automotive.
Tax changes for short term rental operators: Since 2023, CRA has disallowed expense deductions for non compliant short term rentals. If this is you, it is important to be aware of the rules.
Edmonton man defrauded by tax consultant Cautionary tale for anyone who gives their tax information to a representative (although to be fair this is very uncommon)
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