The second phase of the Canadian Pension Plan (CPP) enhancement program has come into effect as of January 2024, and with it, the final CPP contribution rate increase for most Canadians. In an effort to ensure adequate retirement pensions, this seven-year government initiative involving incremental raises to the contribution rate came into effect in 2019, and it involved incremental raises to the contribution rate.
Now, the second CPP enhancement is introducing an additional “earnings ceiling,” which will affect some middle- and high-income earners. Does that include you? Learn everything you need to know about the CPP enhancement and the 2024 changes in this explainer.
Why are CPP contributions increasing?
The CPP is one of three primary government programs, along with Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), designed to provide Canadians with income to last them throughout retirement. For some workers, this amount is supplemented by an employer-provided defined benefit (DB) plan, which guarantees a certain amount of income for life, while others save for retirement using vehicles like registered retirement savings plans (RRSPs).
According to Evan Parubets, head of the advisory services team at Steadyhand Investment Funds Inc., this approach worked for many decades. “We used to have average savings rates of over 20% in Canada, back in the early ’80s,” he says, “but saving rates have basically been falling for decades.”
Declining personal savings isn’t the only issue. “Over the last several decades, companies have let go of defined benefit plans and replaced them with defined contribution plans,” Parubets says. These packages have employers matching employee contributions for investment. “This brought in more unpredictability towards retirement.”
By 2019, it became clear that many Canadians were not going to have sufficient savings or assets for their retirement, says Parubets. “The government made a decision to essentially enhance the government benefits to make up for the lack of private benefits.”
The CPP enhancement
Introduced in 2016 and begun in 2019, the CPP enhancement is a seven-year program designed to boost retirement pensions by increasing the amount of CPP contributions.
How CPP contributions are calculated
Since the CPP was introduced in 1965, Canadian workers have contributed by way of payroll deductions or, in the case of self-employed people, at tax time.
Each Canadian worker can earn up to $3,500 (the “basic exemption amount”) without paying into CPP. Think of this as your personal base rate when you file your taxes. Any money you earn after that is subject to CPP deductions—up to the year’s maximum pensionable earnings (YMPE). The YMPE is also called an “earnings ceiling”—that is, anything earned above this amount will not be subject to additional CPP contributions.
In 2018, prior to the first enhancement, the rate for Canadian employees was 4.95% (with employers matching this contribution). Self-employed Canadians paid double—or 9.9%—because for these purposes, they serve as both the employer and employee. So, with a YMPE of $55,900 in 2018, an employed person earning that much or more would pay 4.95% in CPP on $52,400 ($55,900 minus the basic exemption amount of $3,500), for a total of $2,593.80. A self-employed person making $55,900 or more would pay double, for a total of $5,187.60.
The first enhancement (CPP1)
The federal government introduced the CPP enhancements as a seven-year plan with two phases, each with escalating YMPEs and CPP contribution rates. This way, Canadians wouldn’t have to absorb the new costs all at once.
The first enhancement, CPP1, went into effect in 2019 with a YMPE of $57,400 and a CPP contribution rate of 5.1% (10.2% for self-employed people). Over the next five years, both the YMPE and the contributions rates increased marginally. In 2023, the YMPE was $66,600 with a contribution rate of 5.95% (11.9% for self-employed people).
The second enhancement (CPP2)
The final phase of the CPP enhancement starts in January 2024. Instead of raising the rates further, this phase adds a year’s additional maximum pensionable earnings (YAMPE), or second earnings ceiling, with a contribution amount of 4% for employees and 8% for freelancers and other self-employed Canadians. In other words, the second earnings ceiling is meant to capture a portion of the income of higher-earning Canadians.
To understand how the CPP enhancements work, let’s use an example of someone with an annual salary of $100,000, to make the math clear.
Jameela from Edmonton earns $100,000 annually as an employee. Under CPP1, with the 2023 rates of 5.95% and a YMPE of $66,600, she would owe $3,754.45, based on the following formula: ($66,600 minus the basic exemption amount of $3,500) x 5.95%. Jameela would pay nothing on any amount she makes over $66,600.
In 2024, with a YMPE of $68,500 and a YAMPE of $73,200, Jameela’s CPP contributions are a bit different. She will pay 5.95% on the first $68,500 (minus $3,500), for a total of $3,867.50. In addition, she owes 4% on the money she earns between the first and second earnings ceilings (or between the YMPE and YAMPE), which is: $73,200 – $68,500 = $4,700. Multiplied by 4%, that comes out to $188. Her contributions will total $4,055.50.
How much are CPP contributions going up in 2024?
As of 2024, the CPP contribution rates for employees and the self-employed are the same as in 2023: 5.95% and 11.9%, respectively, unless they make more than the YMPE, which is $68,500 in 2024 and an estimated $69,700 in 2025.
Workers who make more than the YMPE will contribute more—at a rate of 4% for employees and 8% for freelancers. This rate will only apply to the earnings between the first and second earnings ceilings.
How does the CPP enhancement affect freelancers?
Self-employed Canadians have always had to pay both the employer and employee portions of their CPP contributions, and it’s no different with these enhancements.
“Compared to employed individuals, they are certainly at a disadvantage in the sense they have to pay double,” Parubets says. “Nevertheless, it is a form of savings. You’re getting that money back.” Plus, everyone can claim a federal tax credit of 15% of their CPP contributions. Self-employed contributors can also deduct the employer portion of their CPP contributions yielding tax savings at their marginal tax rate.
As with Canadian employed workers, just how much a Canadian freelancer will pay depends on their income. For example:
James is a freelancer in Quebec City who makes $55,000 per year, so his earnings fall under the first earnings ceiling. He will pay 11.9% on his eligible income. However, in 2025 he takes on a new client and his earnings jump to $80,000. Therefore, he will pay 11.9% up to the YMPE and 8% on the money between the YMPE and the YAMPE.
It bears mentioning that in the example of James, living in Quebec, he will be contributing to the Quebec Pension Plan (QPP). The QPP mirrors the CPP in terms of contributions and earnings thresholds, as well as pension payments.
What about low-income Canadians?
Most Canadians, no matter their incomes, will benefit from the raised CPP rates when they retire due to a higher pension, with one notable exception—retired workers who qualify for the GIS.
“Say you’ve been working low-income jobs all your life and contributing to CPP. Eventually you’ll get your money back,” says Parubets. “But if you’re still low-income and on GIS, they’ll claw back the GIS pension money that you would have otherwise been entitled to.” (A clawback is a means-tested reduction in government benefits.) The clawback rate hovers somewhere between 50% and 75%. “A person who’s never worked and never contributed to CPP will likely get most if not all their GIS benefits.”
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Keph Senett
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