Are you or your company navigating the complexities of Canada's retirement income system? You're not alone. For employers managing payroll and employees planning for their financial future, understanding the Canada Pension Plan (CPP) is more than just a necessity—it's a crucial part of ensuring long-term financial stability. Whether it’s about meeting your legal obligations or making sure you’re setting yourself up for a secure retirement, having a clear understanding of CPP is key.
But don’t worry—whether you’re an employer or an employee, we’re here to help you get a clear picture of how CPP works in Canada. In this guide, we’ll break down the essentials, from mandatory contributions to the benefits employees can expect in their retirement years. By understanding the system, you can make informed decisions that will help you or your employees maximize the advantages offered by the CPP.
Let’s dive into the details and explore everything you need to know about the Canada Pension Plan.
What is the Canadian Pension Plan?
Canada’s retirement system is built on a three-pillar framework, designed to provide multiple sources of income during an employee’s later years.
The first pillar, the Old Age Security (OAS) program, is funded through general tax revenues and stands as the primary government-administered pension benefit. Next comes the Canada Pension Plan (CPP) or Québec Pension Plan (QPP), which forms the second pillar, financed by contributions from both employers and employees, along with investment returns. The third pillar includes workplace pension plans and personal savings options, like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), giving individuals the opportunity to supplement their retirement income through private savings.
Now, let’s dive deeper into the Canada Pension Plan. CPP is a government-run system that plays a vital role in ensuring that Canadians have a reliable income stream in their later years. Operating in conjunction with Old Age Security (OAS), CPP is designed to supplement your income once they leave the workforce.
For most working Canadians and their employers, CPP contributions are mandatory. Each pay period, a portion of their earnings is automatically directed to CPP, up to a specified maximum annual amount. Self-employed individuals must also contribute based on their net business income, ensuring they also benefit from the plan.
Employers are responsible for matching their employees’ contributions, and both amounts are then remitted to the Canada Revenue Agency (CRA).These contributions are managed by the CPP Investment Board, a Crown corporation tasked with overseeing one of the world’s largest investment fund, with over $646 billion in assets under management.
As you approach retirement - typically between the ages of 60 and 65 - retirees can start drawing on your CPP benefits, providing them with a dependable monthly income that helps ensure their financial security during their golden years.
CPP Enhancement and Second Additional CPP Contributions
Canada’s retirement system has been strengthened in recent years, with the Canada Pension Plan (CPP) enhancement playing a key role. Introduced in 2019, the enhancement gradually increases the retirement benefits that Canadians can expect to receive, addressing the need for better income security during retirement. As part of this enhancement, the second additional CPP contributions, commonly referred to as "CPP2," began on January 1, 2024. These contributions are particularly important for workers who earn higher wages, as they are made in addition to the base CPP and the first additional CPP contributions.
Understanding the First and Second Earnings Ceilings
To fully understand how CPP2 works, it’s important to know about the earnings ceilings that dictate the contributions. The first earnings ceiling, known as the Year’s Maximum Pensionable Earnings (YMPE), is the threshold up to which the base CPP and the first additional contributions apply. For 2024, the YMPE is set at $68,500. CPP contributions are made on earnings up to this amount.
With the introduction of CPP2, a second earnings ceiling has been established, known as the Year’s Additional Maximum Pensionable Earnings (YAMPE). This second earnings ceiling is set higher than the YMPE, at $73,200, and represents the upper limit for CPP2 contributions. This means that for earnings above the YMPE, and up to the second earnings ceiling, CPP2 contributions will be applied for both employees and employers. CPP2 won't replace the first earnings ceiling; rather, it will impose two separate earnings limits on workers' income. Essentially, workers earning higher wages will now contribute more to their CPP, ensuring they receive higher retirement benefits in the future.
These additional contributions, spread across the base CPP, first additional CPP, and now CPP2, are part of a broader strategy to enhance retirement security for Canadians, especially those who have higher incomes.
How CPP works in Quebec
As with many things in Canada, Quebec operates with a separate but similar system. Rather than contributing to CPP, employees and employers in Quebec contribute to the Quebec Pension Plan (QPP). QPP contributions are remitted to Revenu Québec, rather than the CRA. Beyond this, the principles remain largely the same. We’ll highlight any key differences as we explore further.
Who has to contribute to CPP?
Virtually all employment in Canada, including self-employment, is known as pensionable employment, meaning that CPP deductions and contributions apply. Therefore, CPP contributions also apply to virtually all companies employing people in Canada, regardless of whether those employees are citizens or not. Employers must deduct CPP contributions from an employee's earnings if that employee meets all the following conditions:
- the employee is in pensionable employment during the year,
- the employee is not collecting a disability pension under CPP, and
- the employee between 18 and 69 years old, even if the employee is receiving a CPP retirement pension.
The one exception to this is if an employee is at least 65 years old but under the age of 70, that employee can opt out of paying CPP contributions by filling out a form known as Form CPT30 with their employer.
How CPP deductions and contributions are calculated
Deductions and contributions to CPP are calculated based on the employee's earnings throughout the year. These earnings are called pensionable earnings. The contribution rate, or the proportion of earnings that an employee and employer must contribute, along with the maximum amount of contribution, is adjusted to reflect changes in the average wage in Canada.
Contributions When Earnings Are Within the First Ceiling (YMPE)
The maximum pensionable earnings amount for 2024 is set at $68,500 - up from $66,600 in 2023, meaning CPP contributions are required on the first $68,500 of an employee’s earnings. The contribution rate for both employees and employers is 5.95% each, with a base exemption amount of $3,500 per year.
To break it down, the most an employee will be required to contribute to CPP in 2024 is calculated as follows: ($68,500 - $3,500) × 5.95% = $3,867.50. The contribution rate for employers is the same, so the maximum contribution for each employee from the employer is also $3,867.50.
Let's consider an example: Suppose an employee is paid $1,875 semi-monthly (twice per month), with 24 pay periods per year. That translates to an annual salary of $45,000. For each pay period, the CPP contribution would be [($45000 - $3,500) × 5.85%] ÷ 24 = $102.86. The employer must therefore deduct $102.86 from the employee’s pay, contribute an additional $102.86, and remit a total of $205.77 to the CRA for that pay period.
Contributions for Earnings Above the First Ceiling and Up to the Second Ceiling (YAMPE)
Starting in 2024, an additional layer of contributions, known as CPP2, has been introduced as part of the CPP enhancement. CPP2 contributions are calculated similarly to the basic CPP and first additional contributions but include some key differences due to the introduction of a second earnings ceiling.
The second additional contribution rate for CPP2 is 4.0% for both employees and employers on earnings above the YMPE, and up to the amount of the second earnings ceiling (the YAMPE).
For example, if an employee earns $72,000 annually, the contribution amount on income up to the first earnings ceiling (YMPE) is calculated as follows: ($68,500 - $3,500) × 5.95% = $3,867.50. Since the employee’s annual income exceeds the YMPE, additional contributions are required on the portion of income that falls between the first and second earnings ceilings (YAMPE). In this case, the income above the YMPE but below the YAMPE is $3,500 ($72,000 - $68,500). Applying the 4% contribution rate to this amount, the CPP2 contribution totals $140.
In summary, the employee’s total CPP contributions for 2024 amount to $3,867.50 on income up to the YMPE, plus an additional $140 on income between the YMPE and YAMPE, bringing the total contribution to $4,007.50. If the employee is paid semi-monthly, across 24 pay periods in the year, the contributions would be spread evenly across each pay period. This results in a semi-monthly contribution calculation of $4,007.50 ÷ 24 = $166.98. Thus, for each pay period, the employee would contribute $166.98, with the employer matching this contribution, leading to a total remittance of $333.96 to the CRA per pay period.
Contributions and deductions under the QPP
The contribution rate for QPP is higher than that of CPP, at 6.40% in 2024. However, the maximum pensionable earnings remain the same at $68,500. If your employment income exceeds $68,500, you’ll be required to contribute to the additional QPP plan at a rate of 4% on the portion of earnings between $68,500 and $73,200. Contributions stop once your earnings surpass $73,200, which is the legal maximum. This operates similarly to the CPP2 calculation under the federal plan. This is similar to the calculation of the CPP2 under the federal plan. Unlike CPP, contributions to QPP are remitted to the province's Revenu Québec (ARQ) and are managed by the Caisse de dépôt et placement du Québec.
There are certain nuances when a company transfers an employee from another province or territory to Quebec or vice versa. In this case, there is a formula that is used to reconcile the contributions in the two pension plans and the employer must make sure that enough contributions to CPP are withheld, future benefits are not affected, and that two T4 slips are prepared at the end of the year.
CPP benefits
Similar to the U.S. Social Security system, CPP provides several types of benefits to people who have contributed:
- Retirement pension. Full CPP retirement benefits start at age 65. The employee may apply as early as age 60 with a permanently reduced benefit amount, or as late as age 70 with a permanently increased benefit amount.
- Post-retirement benefit. Between the ages of 60 and 70, if the employee keeps working while receiving a CPP retirement pension, the employee can continue to contribute to CPP which goes toward post-retirement benefits that increase their retirement income.
- Disability benefits. Employees under 65 who cannot work due to a disability can get disability benefits.
- Survivor's pension for spouses or common-law if the employee dies.
- Children's benefits for children up to age 18, or 25 if they are studying, if the employee dies or becomes severely disabled.
- A one-time death benefit to the employee's beneficiaries if the employee dies.
The amount of CPP benefits is calculated based on the number of years of contribution and the amount of contribution in the 40 highest earning years. To receive the maximum CPP benefit, individuals must have contributed the maximum amount to CPP for each of those 40 years. In 2024, the average monthly payment at age 65 is $816.52 and the maximum monthly payment is $1,364.60.
Up until 2019, the Canada Pension Plan (CPP) retirement pension covered 25% of an employee’s average work earnings. However, with the introduction of the CPP enhancement, this replacement rate is gradually increasing to cover 33.33% of average earnings after 2019. In addition, the maximum earnings protected by the CPP will see a 14% increase between 2024 and 2025.
For those who make enhanced contributions over a period of 40 years, the maximum CPP retirement pension could increase by more than 50%, offering a substantial boost to financial security in retirement.
Applying for CPP benefits
To receive pension benefits under CPP, the individual must be at least 60 years old and must have made at least one valid contribution to CPP throughout their life.
Benefits are not automatically given to employees and when eligible, employees must apply either online or on paper to Service Canada. In addition to being of the age of eligibility and having made a valid CPP contribution, employees must have a Social Insurance Number, or SIN, in Canada.
Social security of other countries
Canada has social security agreements with more than 50 countries, including the United States. This is to reduce the instances where the employee will be making contributions to two pension systems. Similar to CPP, most people employed in the United States must pay into the country's Social Security system.
Canada's government-run pension plans can be confusing for foreign businesses especially when the intention is to run payroll in different provinces. While Canada has social security agreements with other countries, like the United States, it is still important for foreign businesses to carefully understand the requirements of CPP and/or QPP.
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