06 Jun The Canadian Pension Plan Enhancement

Posted at 07:38h in Latest News by 06 Jun

The Canadian Pension Plan (CPP) is a mandatory pension plan funded by contributions from employees, employers, and self-employed individuals. It covers almost all workers in Canada except those in Quebec, which has its own Quebec Pension Plan (QPP). The CPP provides basic earnings replacement for contributors in cases of retirement, disability, or death. 

In January 2019, the federal government began a CPP enhancement program designed to increase the maximum CPP retirement benefit. Once fully in place in 2064, the program will increase the maximum CPP retirement benefit by almost 50%. 

Why the CPP enhancement was implemented?

  • To mitigate the effects of inflation and the increasing living costs on retirement income
  • To decrease the number of families vulnerable to inadequate retirement savings
  • To help younger workers who are finding it more challenging to save for retirement

 

How the CPP enhancement works

Before 2019, the CPP rate was 4.95%. Between 2019 and 2023, the Year’s Maximum Pensionable Earnings (YMPE) and the contribution rate for employees and employers increased gradually each year. By 2023, the YMPE was $66,600, and the contribution rate increased to 5.95%.

As of January 1, 2024, the final phase of the CPP enhancement took effect. Instead of another rate increase, this second phase introduced the Year’s Additional Maximum Pensionable Earnings (YAMPE), or a second earnings ceiling of $73,200. Those who earn more than the 2024 YMPE of $68,500 now have to contribute to this second-enhanced CPP.  

With the second enhanced CPP, employees now contribute 4% of their earnings above the original limit of $68,500 to this new ceiling of $73,500. 

In summary, this means in 2024, the CPP now consists of:

  • The CPP contribution rate – 5.95%
  • The second additional component, which is being phased in between 2024 and 2025 – 4% on earnings between the YMPE and YAMPE

Employers will pay the same increase in contributions as their employees. 

 

What does this look like in an example?

Anya earns $100,000 annually as an employee. 

In 2023, with a rate of 5.95% and a YMPE of $66,600, her contributions were calculated as follows:

($66,600 – $3,500 basic exemption) x 5.95% = $3,754.45. 

She did not pay contributions on earnings above $66,600.

 

Now, in 2024, with a YMPE of $68,500 and a YAMPE of $73,200, Anya’s CPP contributions are calculated differently:

First enhanced CPP: ($68,500 – $3,500) x 5.95% = $3,867.50. 

The second enhanced CPP is 4% on the earnings between the YMPE and YAMPE, calculated as: 

$73,200 – $68,500 = $4,700. 

$4,700 x 4% = $188.

 Her total 2024 CPP contributions will be $3,867.50 + $188 = $4,055.50.

There will now be an additional T4 box in 2024 for her Second CPP Contribution, box 16A. 

 

If you have any further questions about the enhanced CPP, please contact your bookkeeper or payroll specialist. Additional resources are available at the Canada Revenue Agency.