The proposed expansion of the Canada Pension Plan poses a threat to many small and medium-sized businesses and could prevent them from hiring new workers or delay important investments, top business lobby groups say.

"The announced agreement to expand the CPP will basically be a form of payroll tax which, when it is in full force, will put further financial strain on Canada's already struggling businesses and on the middle class," Perrin Beatty, president and chief executive of the Canadian Chamber of Commerce, said in a statement Tuesday.

The new plan, agreed to late Monday by federal Finance Minister Bill Morneau and all provincial finance ministers except for Quebec and Manitoba, will require workers and their employers to pay higher contributions.

Story continues below advertisement

Under the current CPP, employers and employees each contribute 4.95 per cent of income between $3,500 and $54,900. The maximum CPP benefit is $13,110. The average annual payment is $7,974.84.

Under the new deal, the upper earnings limit would rise to $82,700 by 2025. The current CPP deal is meant to replace 25 per cent of earnings up to the ceiling, while the new plan would aim to replace one third of income up to the new, higher ceiling.

But Ottawa has so far not disclosed how much the move from a payout of 25 per cent of earnings to 33 per cent will cost, the Chamber of Commerce said.

"When a government promises big increases in benefits without telling us how much it will cost or who will pay for it, we know there's a big bill coming," Mr. Beatty said. "Employers may have to halt job creation in order to pay for this CPP increase, or delay important investments."

The Canadian Federation of Independent Business said the proposed CPP expansion is "a devastating move for Canadian workers and the economy in general."

"It is tremendously disappointing to see that finance ministers are putting Canadian wages, hours and jobs in jeopardy and willfully moving to make an already shaky economy even worse," CFIB president Dan Kelly said.

Entrepreneur Albert Schepers said the proposed pension reform is like a slap in the face to the small business sector, a major creator of jobs. "From a small business perspective, it's going to hit us," said Mr. Schepers, president and senior engineer at GS Engineering Consultants Inc. in Windsor, Ont.

Story continues below advertisement

He employs seven full-time and three part-time workers but says the new CPP deal will affect future hiring.

"Instead of hiring somebody full-time, because you're committed to paying these payroll taxes, you might hire someone on a contract and part-time. So you're going to find more people are working part-time."

Jim Harkness of farm-equipment provider Harkness Equipment in Harriston, Ont. said he's disappointed at what he called a lack of consultation with business owners by governments, although he understands their intentions. His company employs between 28 and 35 people.

"We're finding that with all the other programs, and everything we're forced to pay through the government, any increase to CPP would almost be a hardship. It's just increasing payroll expenses to a point where we can't afford to hire people anymore" when belt-tightening is the order of the day.

For Michael Pearson, president of Toronto-based IT consulting and design firm Contax Inc., the deal amounts to a payroll tax that will add to his company's cost of employment.

"It makes it costlier to hire people," he said in an interview. "Any increase in the cost of employment is going to have a negative effect on hiring."

Story continues below advertisement

"The more employment costs go up, the less we hire in that jurisdiction," he said. Contax has about 100 employees in Canada, 150 worldwide. Operations outside Canada include Australia and the Netherlands. Contax has offices in Ontario, Quebec and Prince Edward Island.

Additional CPP costs could also have a negative impact on the company's private pension benefits in the form of reduced contributions to that plan, Mr. Pearson added.

The only positive thing about the agreement is that Ontario will not go ahead with its proposed Ontario Retirement Pension Plan – "the CPP's far uglier cousin" – said Mr. Kelly of the CFIB.

Ontario's proposed pension plan that would have imposed new premiums of 1.9 per cent of eligible income up to $90,000.

"It's a shame that Ontario spent millions of dollars to effectively bully the smaller provinces to force their pension agenda," Mr. Kelly said.

The Canadian Chamber of Commerce echoed that sentiment. "The silver lining of the agreement is that it likely means Ontario will not be moving ahead with its separate plan, the Ontario Retirement Pension Plan, which would have been an even worse strain on businesses of that province," it said.

Story continues below advertisement

Canada's life and health insurance industry was more positive in its reaction to the deal.

"While we look forward to more details, we are pleased that the federal and provincial governments have committed to a modest increase in CPP," Canadian Life and Health Insurance Association president and CEO Frank Swedlove said. "However, we continue to believe any CPP enhancement should be targeted to those sectors of the population that need to increase their savings for retirement, and that they will be available to all Canadians no matter where they work or live."

The Investment Funds Institute of Canada welcomed the plan as a "historic agreement-in-principle on pension reform."

"We commend the ministers for their commitment to building on Canada's strong retirement framework," IFIC president and CEO Joanne De Laurentiis said.

Royal Bank of Canada said in a statement: "We have no changes planned for our employee pension plans at this time. We will carefully review the CPP enhancements and consider the expected impacts on all of our employees, at all career stages."

Janet Ecker, CEO of the Toronto Financial Services Alliance, which promotes Toronto as a "top tier" global centre, said: "While we would have preferred a more targeted approach, we are pleased that both the federal and provincial governments have agreed to an enhancement of the CPP that will be easy to administer and will improve retirement income security for Canadians."