As you may know, the Canada Pension Plan (CPP) is the federal government’s pension program, designed to replace some of your income after you retire. For 2021, the maximum CPP payment was $1,203.75.
However, what you may not know is that this amount is by no means guaranteed. To qualify for CPP you need to have made CPP contributions (which, for most people, come in the form of CPP deductions from your paycheque). How much you receive when you retire will depend on your age when you started making CPP contributions, how much you contributed and your average earnings.
Most Canadians don’t receive the maximum CPP payment: in fact, the average monthly CPP payment in 2021 was just under $620. In this article, we’ll answer some of the most frequently asked CPP questions, including: what are CPP deductions, exactly, and how do they work; what is CPP tax; is CPP taxable income: what are EI and CPP maximum contributions; and what are self-employed CPP contributions?
What is a Statement of Contributions to CPP
The CPP keeps every Canadian’s CPP records on their Statement of Contributions. This record provides you with valuable information about your personal Canada Pension Plan, including:
- CPP employer contributions
- CPP employee contributions
- Earnings from your CPP contributions
- An estimate of your pension benefit’s value if you were able to receive it now
This can be really helpful when planning for your retirement, as it details how much monthly CPP income you are likely to receive, depending on when you retire.
CPP Deductions on Payroll
The amount of your CPP employee contributions (the amount you pay into your plan) and CPP employer contributions (the amount the company you work for pays into your plan) will depend on how much you earn. You start your CPP employee contributions when you earn above the minimum amount, which is known as the basic exemption.
Both your CPP employer contributions and CPP employee contributions stop when you reach the maximum CPP contribution limit (called maximum pensionable earnings). Below are the details of the basic exemption amount and the maximum CPP contribution amount for 2021:
- Maximum annual pensionable earnings: $61,600
- Basic exemption amount: $3,500
- CPP employee contribution rate: 5.45%
- CPP employer contribution rate: 5.45%
- Maximum CPP employer contribution: $3,166.45
- Maximum CPP employee contribution: $3,166.45
What is the CPP deduction if you earn less than $3,500 in any year? In this case, there will be no CPP deductions required. And once you earn over $61,600, you will have reached your maximum CPP contribution for that year and will have no further CPP deductions from your paycheque.
There are CPP income tax calculators available to help you calculate your CPP contributions, but the math is fairly simple:
(Annual income – $3,500) x 0.0545
Below are some examples of CPP deductions for different income levels:
Annual CPP deductions
What is the CPP deduction for 2022 and beyond?
In 2019 the federal government started increasing both the CPP employee contribution and the CPP employer contribution amounts. In 2018, the CPP contribution amount was 4.95% and this was bumped up to 5.1% in 2019.
The government put in place a plan to increase CPP contributions every year, over a five-year period, with the goal being a more substantial CPP payment when Canadians come to retire. In 2020 the amount rose to 5.25% and it was planned to increase to the following amounts over the following years:
Is CPP taxable income and what is the CPP tax rate?
When you begin drawing from your CPP pension, the CRA classes it as income. So, the quick answer to the question is CPP taxable income, is yes. However, the answer to the question, what is the CPP tax rate, is a little more complex.
This is where a CPP income tax calculator, CPP tax deduction tables or an accountant can come in very handy. Your CPP tax rate will depend on how much total taxable income you have in any given year.
Tax is not deducted automatically from your CPP pension, but you can ask for it to be taken off your monthly payments via your My Service Canada Account or by filling in and submitting the Request for voluntary Federal Income tax Deductions CPP/OAS (ISP3520CPP) form. This will mean you won’t need to use CPP tax deduction tables, as the math will be done for you.
Is CPP taxable income if I don’t earn much in a year? That would depend on the exact amount that you earn and which province you live in. For the 2021 tax year, the federal basic personal amount (the amount you can earn without paying federal tax) is $13,808, but provinces have different basic personal tax credit amounts. You can find them on the Government of Canada website.
CPP contributions after 65
When you reach 65, you can choose to stop your CPP contributions. However, if you continue to make CPP contributions after 65, you will qualify for the Post-Retirement Benefit, which means your CPP monthly amount will be increased.
CPP and EI max deductions
Employment Insurance (EI) is a government program that provides temporary income support to unemployed workers while they search for employment. Employers deduct EI premiums from all employees, who contribute to EI.
CPP and EI are similar in that they are both deducted at source (from your paycheque). Also, both CPP and EI have max amounts of deductions. However, CPP and EI max deductions are different, as are their contribution rates. The EI contribution rates and limits below show how CPP and EI max deductions differ:
- EI maximum insurable earnings: $56,300
- EI employee contribution rate: 1.58% (1.18% in Quebec)
- EI employer contribution rate: 2.212% (1.652% in Quebec)
- EI maximum employee contribution: $889.54 ($664.34 in Quebec)
Self-employed CPP contributions
What is the CPP deduction rate if you are self-employed? Your maximum annual pensionable earnings and basic exemption amount are the same as for employed people. However, you have to pay both the employee and the employer portions of contributions, so the rates are:
- lf-employed contribution rate: 9.9%
- Maximum self-employed contribution: $6,332.90
What is a Canada Pension Plan and Employment Insurance ruling? This is an official decision made by the CRA on whether a worker is an employee or self-employed and if they need to pay CPP contributions or EI premiums.
Ways to increase your retirement income
As we’ve seen, the average monthly CPP payment is only $620. The other primary federal retirement benefit, the Old Age Security pension, is only worth a maximum of $626.49, if you qualify for the full amount. For those retirees who have no company pension, RRSPs or other retirement savings, living off less than $1,250 per month is not going to bring the kind of standard of living that most retirees would want.
Increasingly, Canadian homeowners aged 55+ are turning to their biggest asset to boost their retirement income: their home. A CHIP Reverse Mortgage allows you to cash in up to 55% of your home’s appraised value, either in a lump sum or in monthly payments. The money can be used for any purpose, such as to help cover household expenses, to pay for vacations, to finance renovations or simply to provide some extra spending money to make your retirement more enjoyable.
And the best part is that you don’t need to make any regular mortgage repayments. You only pay back what you owe when you decide to move out or sell your home. Call us at 1-866-522-2447 to find out how much you could borrow to increase your retirement income.