How Your Paycheck Could Get Smaller Next Year with 2021 CPP Contribution Rates

Last week, the Canadian government announced their updated 2021 CPP contribution rates in addition to confirming the TFSA room for next year.

Employers and employees throughout Canada are required to contribute into the Canada Pension Plan yearly. The program is designed to provide Canadians a retirement or disability income.

As part of the CPP enhancements that took effect in 2019, CPP contributors will see their paychecks get smaller next year due to increasing contribution rates.

Since the beginning of 2020, the contribution rate has been 5.25% with each employee and employer contributing an equal share. As of 2021, the contribution rate is set to increase 5.45% meaning $268.45 more out of your pay.

The basic exemption amount is still flat at $3,500 but the YMPE for 2021 has increased to $61,600.

2021 CPP Contribution Rates

Yearly Maximum Pensionable Earnings

Long Time Coming

In 2016, the federal government made the CPP’s expansion as one of it’s initiatives with the goal of increasing funding and future obligations for many generations to come. The initiatives recently began in 2019 and so far look to continue beyond 2021.

Many employers and employees are not happy with the rise of the 2021 CPP contribution rates as it means less money for them to take home and with everyone struggling to pay their bills, this will surely take a toll on many Canadians.

CPP Contributions Example

Contributory Earnings to the Canada Pension Plan is essentially all the employment earnings above the Year’s Basic Exemption Amount ($3,500) and up to the Yearly Maximum Pensionable Earnings (YMPE). For 2020, the YMPE is $58,700.

• Example – In 2020 Janice, age 34, is expected to earn $90,000 as a deli manager at Loblaws. How much in CPP contributions need to be paid in 2020?
  • Janice’s pensionable earnings is $90,000. We would use the lesser of total pensionable earnings and YMPE (i.e. lesser of $90,000 or $58,700) which is $58,700.
    • $58,700 – $3,500 = $55,200
    • Employee Contribution: 5.25% * $55,200 = $2,898
    • Employer Contribution: 5.25% * $55,200 = $2,898
• The contribution rates for employees and employers is ever changing in accordance with salaries and wages. As we know the 2021 CPP contribution rates have increased.

2021 Tax Free Savings Room

The federal government also announced that they’re keeping the 2021 TFSA contribution room at $6,000, raising the total contribution room since 2009 to $75,500.

The program started in 2009 with a $5,000 limit and over the years, the limit has increased each year.  Canadians who are 18 years of age or older with a valid social insurance number (SIN) are allowed to open a Tax Free Savings Account.