Backgrounder
The Canada Pension Plan (CPP) enhancement, introduced in 2019, aims to boost retirement income for Canadian workers and their families. This enhancement gradually increases CPP contributions and benefits over several years.
How the CPP Enhancement Affects You
- Increased Contributions: Starting in 2019, CPP contribution rates have been steadily rising. For example, if you earn $82,000 per year, your 2025 contributions will be $374.60 higher than in 2024.
- Higher Benefits: The enhancement will significantly increase maximum CPP retirement pensions, survivor pensions, and disability pensions.
- Eligibility: You’ll only benefit if you contributed to the CPP in 2019 or later.
Understanding the Canadian Retirement Income System
Canada’s system relies on three pillars:
- Old Age Security (OAS): Provides a basic level of retirement income funded by government revenues.
- CPP/QPP: Offers basic income replacement for contributors and their families.
- Voluntary Savings: Includes Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and employer-sponsored pension plans.
Who Participates in the CPP
- Most individuals working in Canada (excluding Quebec) who earn over $3,500 per year must contribute.
How Contributions Work
- Employees: CPP contributions are deducted from your paycheque by your employer.
- Self-Employed: You contribute the full amount when filing your income tax return using Schedule 8.
Contribution Rates
- 2019-2023: Gradual increases in contribution rates.
- 2024-Present: Introduction of the “Year’s Additional Maximum Pensionable Earnings” (YAMPE) – a second earnings ceiling. This applies to income above the initial earnings ceiling, resulting in “CPP2 contributions.”
Key Differences: Tax Deduction vs. Non-Refundable Tax Credit
- Tax Deduction: Reduces your taxable income, lowering your overall tax burden.
- Non-Refundable Tax Credit: Directly reduces your income tax liability.
CPP Contributions: 2019-2025
- 2019-2023: Steady increase in contribution rates for employees and self-employed.
- 2024-Present: Introduction of CPP2 contributions on income between the first and second earnings ceilings.
Examples
- Damien (Employee): Low income, no CPP2 contributions.
- Pierre (Self-Employed): Income above the first earnings ceiling, making CPP2 contributions.
- Ayesha (Employee): High income, making CPP2 contributions.
Disclaimer: This blog post is for informational purposes only and does not constitute professional tax advice. Consult with an SJT CPA professional for personalized guidance on the CPP enhancement and its impact on your specific situation.
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The SJT CPA Team
