Higher-income earners will contribute more to CPP, but get more too

Jamie Golombek: A second CPP contribution rate and earnings ceiling is being introduced in 2024

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Canada Revenue Agency earlier this month announced the new 2024 numbers for Canada Pension Plan (CPP) contributions, and while the CPP earnings limits and corresponding contributions do go up each year, starting Jan. 1, 2024, phase two of the CPP enhancements means that some higher-income earners will be contributing more, but will also get more in return.

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Before sharing the new 2024 figures, let’s review the basics. The CPP is a mandatory contributory pension plan that 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.

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Enhancements to the CPP began in 2019 and, once fully implemented, could potentially increase the maximum CPP retirement pension by up to 50 per cent for younger workers just starting out. Phase two of the enhancements begins in January 2024.

Both employees and business owners are required to contribute to the CPP based on pensionable earnings. 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 percentage point 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.

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For 2023, Canadians over 18 who make more than $3,500 annually contribute 5.95 per cent of their employment income (above that base amount) to the CPP, up to the year’s maximum pensionable earnings (YMPE), which is $66,600 for this year. This YMPE is referred to as the “first earnings ceiling” in light of the upcoming enhancements. Given the YMPE of $66,600 and the basic exemption of $3,500, this means the maximum employee CPP contribution this year is $3,754 (double that, or $7,509, if you’re self-employed).

For 2024, employee and employer CPP contribution rates will remain at 5.95 per cent, but the maximum pensionable earnings will increase to $68,500, while the basic exemption amount remains at $3,500. This increase was calculated in accordance with CPP legislation, and takes into account the growth in average weekly wages and salaries in Canada.

This means the 2024 maximum CPP contribution will be $3,867.50 for each of the employee and employer portions. The self-employed CPP contribution rate remains at 11.9 per cent, and the maximum contribution will increase to $7,735.

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Starting Jan. 1, 2024, however, a second CPP contribution rate and earnings ceiling is being introduced that will be called the “year’s additional maximum pensionable earnings” (YAMPE). It will only affect workers whose income is above the first earnings ceiling.

The level of the second earnings ceiling is based on the value of the first earnings ceiling. For 2024, the second earnings ceiling was 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’s 14 per cent higher than the first earnings ceiling.

As a result, for 2024, pensionable earnings between $68,500 and $73,200 will be subject to “second CPP contributions” (CPP2) at an employee/employer rate of four per cent, with a maximum contribution of $188 each. The 2024 self-employed CPP2 contribution rate will be eight per cent, and the maximum self-employed contribution will be $376.

Let’s take an example. Mudit has an annual income of $120,000, which is higher than the second earnings ceiling. He 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.

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For 2023, Mudit contributed $3,754 of CPP contributions, being 5.95 per cent of the 2023 YMPE of $66,600, less the $3,500 base amount. For 2024, given the new YMPE of up to $68,500, which is the first earnings ceiling, he will contribute $3,867 of base CPP. Given the second earnings ceiling for 2024 of $73,200, Mudit will contribute the full $188 in second-level CPP for total 2024 CPP contributions of $4,055.

The good news is that Mudit (and all employees) can claim a 15 per cent federal non-refundable credit on 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.

Self-employed Canadians who contribute 9.9 per cent to CPP can claim a 15 per cent non-refundable federal tax credit on 4.95 per cent of the base CPP contributions, and a tax deduction for the other 4.95 per cent. They can also claim a tax deduction on the enhanced portion of their contributions (two per cent in 2023).

For incorporated self-employed business owners, including professionals such as doctors, lawyer and accountants who operate through professional corporations, the increased cost of CPP contributions in 2024 (just over $8,100 for income of $73,200 or more) must be considered when the compensation decision to pay yourself salary or dividends (which are not subject to CPP contributions) is made for next year.

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It’s also important to note that not everyone will fully benefit from the CPP enhancements. How much your CPP benefits increase will depend on how much you contribute to the enhancements and for how long.

For example, the CPP enhancement will only benefit you if you have worked and contributed in 2019 or later. The longer you contribute to the enhanced CPP program, the larger your total CPP pension will be at retirement.

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Consequently, employees just entering the workforce will see the largest increase in CPP benefits while employees who are currently near the end of their working lives will see a small increase. If you’re currently receiving CPP, your CPP benefits won’t increase beyond the annual inflationary adjustment.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. [email protected].

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