What is CPP, and why is it coming off of my paycheck?
In a digital world with auto deposit, I find that often, individuals who see money coming into their accounts don’t look at or try to understand their paycheck deductions. One of the most common deductions seen on your paycheck in Canada is the Canada Pension Plan. CPP is a monthly benefit that replaces part of your income when you retire, and it is also a taxable benefit. To qualify to receive CPP, you must be at least 60 years old, and have made at least one valid contribution to CPP in your working years.
CPP is contributed to by both the employee and the employer at an equal rate, which also means that if you are self-employed, you are paying this rate twice. In 2024 the maximum pensionable earnings are set at $68,500.00. Additionally, the government grants everyone an exemption on the first $3500 you make. This then creates a value known as the maximum contributory earnings of $65,000.00, ($68,500.00 - $3500.00 = $65,000.00). The contribution rate for both employees and employers are set at 5.95% each meaning that 5.95% of your contributory earnings will be deducted throughout the year up to a maximum of $3867.50 for employees and a maximum of $7735.00 for those that are self-employed.
Coming 2024, the government has also introduced a new second addition CPP contribution known as CPP2. CPP2 is similar in nature to the original CPP, however it has additional maximum pensionable earnings of $73,200.00. The employee and employer both contribute to CPP2 at a rate of 4.00% on income earned above the original maximum of $68,500.00. This means that if I have pensionable earnings of $73,200.00 in 2024, my contributions towards CPP and CPP2 will go as follows:
| CPP | |
|---|---|
| Maximum Annual Pensionable Earnings | $68,500.00 |
| Basic Exemption Amount | $3500.00 |
| Maximum Contributory Earnings | $68,500.00 - $3500.00 = $65,000.00 |
| Employee/ Employer Contribution Rate (%) | 5.95% |
| Maximum Annual Contributions for Employees and Employers | $65,000.00 x 5.95% = $3867.50 |
| Maximum Annual Self-Employed Contribution | $65,000.00 x 5.95% x 2 = $7735.00 |
| CPP2 | |
|---|---|
| Additional Maximum Annual Pensionable Earnings | $73,200.00 |
| Employee/ Employer Contribution Rate (%) | 4.00% |
| Maximum Annual Contributions for Employees and Employers | ($73,200.00 - $68,500.00) x 4.00% = $188.00 |
| Maximum Annual Self-Employed Contribution | ($73,200.00 - $68,500.00) x 4.00% x 2 = $376.00 |
When should you start taking CPP?
Ultimately, the decision to retire/ start taking CPP depends on your individual situation, and you should always consult a professional before you do so. However, depending on the age that you apply to start receiving CPP, the amount of benefit you receive will vary.
If you decide to retire before the age of 65 and start taking your CPP payments, the value of your benefits will decrease by 0.6% each month (or 7.2% per year), up to a maximum reduction of 36% if you start taking CPP at age 60.
On the flip side, if you decide to retire/ start taking CPP after age 65, the value of your benefits will increase by 0.7% each month (or 8.4% per year), up to a maximum increase of 42% if you start taking CPP at age 70 or later.
Agency, C. R. (2023, November 23). Second additional CPP (CPP2) contribution rates and maximums. Second additional CPP (CPP2) contribution rates and maximums – Calculate payroll deductions and contributions - Canada.ca. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/calculating-deductions/making-deductions/second-additional-cpp-contribution-rates-maximums.html
Service Canada. (2021, December 9). Contributions to the Canada Pension Plan. Canada.ca. https://www.canada.ca/en/services/benefits/publicpensions/cpp/contributions.html