Whether you’re an employee or self-employed, you are required to contribute to the Canada Pension Plan (CPP), but you may have noticed that the amount you’re required to contribute has been slowly climbing.
The Canada Revenue Agency this week released a helpful backgrounder that details the changes to the CPP system so far, as well as the major enhancements coming in 2024 and 2025. To help prepare you for what’s in store, let’s look at the changes already made and the ones to come.
Let’s start with the basics. The CPP is a mandatory contributory pension plan, which covers nearly all Canadian workers, other than those in Quebec, who are covered by the Quebec Pension Plan (QPP). The CPP provides basic income replacement for its contributors and their families when the contributor retires, dies or becomes disabled. The CPP is financed by contributions from employees, employers and self-employed individuals, and the funds are professionally managed by the CPP Investment Board. As of Dec. 31, 2022, the CPP fund had a balance of $536 billion.
Since 2019, the CPP contribution rate has gradually increased every year, to 5.95 per cent in 2023 from 4.95 per cent in 2018 (before the enhancement), for a total increase of one per cent for both employees and employers. If you’re self-employed, you pay both the employee and employer portions, for a 2023 contribution rate of 11.9 per cent.
If you earn less than the first earnings ceiling, there will be no further CPP rate increases for you. For higher income earners, however, a second CPP contribution rate and earnings ceiling will begin in January 2024, and will only affect workers whose income is above this “second earnings ceiling,” to be known as the year’s additional maximum pensionable earnings (YAMPE).
As of 2024, if you have earnings above the first earnings ceiling, you’ll contribute an additional four per cent (eight per cent if you’re self-employed) of your income between the first earnings ceiling up to the second earnings ceiling. This additional CPP contribution will be known as “second CPP contributions.”
The level of the second earnings ceiling will be based on the value of the first earnings ceiling. For 2024, the second earnings ceiling will be set at an amount that is seven per cent higher than the first earnings ceiling, and for 2025, the second earnings ceiling will be set at an amount that is 14 per cent higher than the first earnings ceiling.
To illustrate, assume Stephanie has an annual income of $100,000, which is higher than the second earnings ceiling each year. She will make base and first CPP contributions at a rate of 5.95 per cent and, beginning in 2024, second CPP contributions at a rate of four per cent on the difference between the annual YAMPE and the YMPE.
In 2025, if we assume the YMPE increases again to, say, $69,700, Stephanie will contribute $3,939 on her income below the first earnings ceiling. The second earnings ceiling will be set 14 per cent higher than the first earnings ceiling, resulting in a YAMPE, or second earnings ceiling, of approximately $79,400. Stephanie will contribute second CPP contributions at a rate of four per cent on her income between the YMPE and the YAMPE, or $388. Thus, her total CPP in 2025 would be $4,327.
To help offset some of the contribution costs, employees can claim a 15-per-cent federal non-refundable credit on the base CPP contributions, which are calculated at a rate of 4.95 per cent, and a tax deduction for both first CPP contributions (one per cent), and the upcoming second CPP contributions.
To help offset some of the contribution costs, employees can claim a 15-per-cent federal non-refundable credit on the base CPP contributions, which are calculated at a rate of 4.95 per cent, and a tax deduction for both first CPP contributions (one per cent), and the upcoming second CPP contributions.
For example, the CPP enhancement will benefit you only if you have worked and contributed in 2019 or later. Consequently, employees just entering the workforce will see the largest increase in CPP benefits while employees who are near the end of their working life will see a small increase. If you’re currently receiving CPP, nothing will change and your CPP benefits won’t increase (beyond the normal annual inflationary adjustments).
Post Credit: Financial Post By Jamie Golombek
(https://financialpost.com/personal-finance/taxes/how-cpp-benefit-changes-affect-you-now-retirement)
