Everyone in Canada who earns a salary or wages is familiar with the deduction taken from each paycheque for contributions to the Canada Pension Plan (CPP). The CPP is one of the two major government-sponsored retirement income programs in Canada – the other being the Old Age Security program.
While the Old Age Security program is financed out of general federal government revenues, the CPP is self-funded by means of contributions made by employees, together with matching contributions made by their employers. (Self-employed individuals pay both the employee and employer portions of CPP contributions).
Several years ago, it was determined that changes were needed to the CPP, to ensure that CPP retirement benefits replaced a greater percentage of working income than was then the case. Those changes to the CPP began in 2019, when the required annual contribution to the CPP began to increase. It was increased each year thereafter, and now stands at 5.95% of annual earnings.
The basic structure of the CPP provides that everyone who is between 18 and 69 years of age and earns more than $3,500 per year must make CPP contributions equal to 5.95% of their income between $3,500 and a specified income ceiling. That income ceiling is known as the Year’s Maximum Pensionable Earnings (YMPE) and is set at $68,500 for 2024.
Beginning in 2024, however, the CPP will change from a single-tier to a two-tier contribution structure, with higher-income individuals required to make an additional CPP contribution. Specifically, individuals who have annual income of less than the 2024 YMPE of $68,500 will continue to make Tier 1 CPP contributions of 5.95% of earnings between $3,500 and $68,500. However, those whose earnings exceed the $68,500 income ceiling must pay 4% of those additional earnings (Tier 2 contributions) up to a second earnings ceiling. That second earnings ceiling – to be called the Year’s Additional Maximum Pensionable Earnings, or YAMPE – is set at $73,200 for 2024.
The effect of the upcoming changes is that individuals who will have income of more than $68,500 during 2024 must pay both the 5.95% contribution on earnings between $3,500 and $68,500 (Tier 1 contributions) and 4% of earnings between $68,500 and $73,200 (Tier 2 contributions).
There are no tax or financial planning steps to be taken in response to the upcoming changes – having CPP contributions deducted from one’s income and remitted to the federal government by one’s employer is mandatory, and there is no ability to “opt out” of making either Tier 1 or Tier 2 contributions.
Individuals who earn less than $68,500 during 2024 will see no change to the CPP contributions deducted from their paycheques, but those earning more than that amount will see increased deductions made for CPP beginning January 1, 2024. It should be noted as well that 2024 is something of a phase-in year for Tier 2 contributions. Those contribution amounts will increase in future years, as the upper income limit (or YAMPE) for such Tier 2 contributions, which is set at $73,200 for 2024, will increase significantly in 2025 and later years.
No one likes to see additional deductions being taken from their paycheque but those who are affected by the increased contribution requirements at least have the satisfaction of knowing that their higher contributions will eventually be reflected in an increase in CPP retirement benefits to which they will be entitled.
Detailed information on the upcoming changes to the CPP (including changes planned for years after 2024) can be found on the federal government website at https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/cpp-enhancement.html.