Canada Pension Plan (CPP) Enhancement

Every individual in Canada who is over 18 years of age, works outside of Quebec, and earns more than $3,500 in a year is required to contribute to the Canada Pension Plan (CPP).

Prior to 2019, employees contributed 4.95% of their yearly maximum pensionable earnings (YMPE) into their CPP with employers matching the amounts, and self-employed individuals contributed 9.9% (to cover both employee and employer portion).
Yearly Maximum Pensionable Earnings (YMPE) is the maximum amount of earnings used to calculate contributions to the CPP. $3,500 of the YMPE is exempt from CPP contributions. For 2018, the YMPE was $55,900. Therefore, maximum annual employee contribution on income of $57,400 in 2018 would be $2,748.90 [($55,900 – $3,500) X 4.95%].

ENHANCEMENT FOR 2019 TO 2023:
Introduced as an enhancement, Canadians were required to contribute more into their CPP commencing January 1, 2019. For 2019, the contribution rate for employees and self-employed individuals rose to 5.10% and 10.2% respectively. For 2020, the contribution rate for employees and self-employed individuals is 5.25% and 10.5% respectively. The YMPE for 2020 is $58,700.

Let’s consider an example:
Julia is currently employed at ABC Company Ltd. and her income for 2020 will be $80,000. Julia will only be required to make CPP contributions for her income up to $55,200, as that is the 2020 YMPE after removing the $3,500 basic exemption amount.

Her maximum CPP contribution for the year will be calculated as follows:

[(YMPE – $3,500 Exempt Portion) X 5.10%] = [($58,700 – $3,500) X 5.25%] = $2,898

Julia’s portion of CPP contributions for 2019 will $2,898 and ABC Company Ltd. will match this amount with another $2,898. This would result in maximum employee and employer contribution of $5,796.

ENHANCMENT FOR 2024 TO 2025:
For tax years 2024 and 2025, a second pensionable earnings limit will be introduced in addition to the YMPE. This new limit will be known as the Year’s Additional Maximum Pensionable Earnings (YAMPE). YAMPE for 2024 will be 7% higher than the YMPE for that year. For 2025, YAMPE will be 14% higher than the YMPE for that year. Employees and employers will each contribute at the rate of 4% and self-employed individuals will contribute at 8% on the YAMPE.

Let’s consider an example:
George is an employee at XYZ Incorporated and will expect to earn gross income of $150,000 in 2024. If we assume the YMPE for 2024 to be $69,700, the YAMPE will be $74,579 (approximately 7% higher than the YMPE for 2024).

George’s CPP contribution on the YMPE will be calculated as follows:
[(YMPE – $3,500 Exempt Portion) X 5.95%] = [($69,700 – $3,500) X 5.95%] = $3,939

George’s CPP contribution on the YAMPE will be calculated as follows:
[(YAMPE – YMPE) X 4%) = [($74,579 – $69,700) X 4%] = $195

Therefore, George will contribute a total of $4,134 ($3,939 + $195) to his CPP in 2024 and his employer will match this amount with another $4,134. This would result in maximum employee and employer contribution of $8,268.