Understanding CPP Contributions

Canada Pension Plan is a monthly retirement taxable benefit that replaces part of your income when you retire. Besides the province of Quebec, CPP contributions are mandatory employers and employees. Quebec has its own version of the plan called the Quebec Pension Plan.

To qualify for Canada Pension Plan, an individual must be:

• be at least 60 years old
• have made at least one valid contribution to the CPP

Canada Pension Plan will pay monthly benefits to qualified contributors:

• in retirement,
• to disabled contributors and their children,
• to widows, widowers and orphaned children of deceased contributors

As well, a lump sum death benefit is payable to the estate of the deceased contributor. This is known as the CPP death benefit.

CPP Contribution Period

Anyone over 18 who earns more than the minimum amount of $3,500 per year is eligible to contribute to the plan, with the exception of Quebec. 

• Basic Exemption Amount: The $3,500 per year is known as the basic exemption amount and it’s the amount you’d have to be earning before you’re eligible to contribute to the CPP. Anything below that is not subject to CPP Contributions. Since 1998, the YBE has been frozen at $3,500.

As well, if you have contributed to the CPP through employer/employee premiums on your pensionable employment income, you’re eligible to receive Canada Pension Plan benefits.

The contribution period commences on the individual’s 18th birthday and extends to age 60 or 70 if the individual continues to work and does not enroll to receive a retirement pension.

• Standard Contributory Period: The standard contributory period is 47 years with the max being 52 years. If you subtract 65-18, you arrive at 47 years. 
• Max Pension: To receive the max pension, you’d have to contribute at least 83% of the time. 83% of 47 is 39 years. You must contribute to the plan for 39 years and the contribution should be sufficient.
• Yearly Maximum Pensionable Earnings (YMPE): CPP uses something called the YMPE to assess whether you contributed enough. To summarize, if your income was less than $58,700 in 2020 then you have not contributed enough to the CPP to qualify for the maximum pension within that 39 year period. If your earnings was higher than $58,700 for 2020, you’ll notice towards the end of the year, your pay is a bit higher as you’ve reached the maximum CPP contribution for the year.
  • The YMPE is adjusted annually to reflect changes in the average wages and salaries.

CPP Contribution Rates

When it comes to Canada Pension Plan contributions, both the employee and their employers must make CPP contributions based on a percentage of the employee’s contributory earnings. The contribution rates are below. A self employed person must contribute both the employer and the employee shares.

2020 Max Annual CPP Contribution = 5.25% * ($58,700 – $3,500)

Employee: $2,898 + Employer: $2,898 = $5,796

Contributory Earnings

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.

Exempt Workers

• Certain type of income is not considered pensionable employment and thus exempt from CPP contributions.

1. Individuals not earning more than the exempt amount of $3,500
2. Migratory Workers who are not employed for at least 25 days a year and who do not earn at least $250 a year from the same employer
3. Casual Workers
4. Members of Religious Orders whose earnings are turned over to the order
5. Election Workers –  CPP is not deducted if both requirements are met – worker is not a regular employee of the government body and works less than 35 hours in a calendar year.

The bottom line is that CPP contributions are meant to help you facilitate a comfortable lifestyle in retirement. Most Canadians rely on Canada Pension Plan and Old Age Security when in retirement.