Changes to CPP pensionable earnings and contributions

Information  

• Products: Sparkrock 2016 and Sparkrock 365 
• Summary: Changes to CPP pensionable earnings and contributions

Details  

Phase 1: Increased employee and employer contributions as follows: 

The contribution rate will rise from 4.95% to 5.95% over five years (2019 – 2023) on the Yearly Maximum Pensionable Earnings (YMPE) 

Phase 2:  A new Additional Yearly Maximum Pensionable Earnings (AYMPE) value will be introduced; targeted to be $80,900 by 2025 

• The upper earnings limit will be phased in over two years (2024 – 2025)
  •   In 2024 AYMPE will be approximately 7% above YMPE 
  •   In 2025 AYMPE will be approximately 14% above YMPE 

• An expected contribution rate of 4% on enhanced earnings (the difference between AYMPE and YMPE) will apply

*Projected earnings are estimates and are subject to change 

**Contributions on YMPE and AYMPE will be matched by the employer 

***Reflects actual YMPE for years 2019 through 2022 

In 2023 phase one of the enhancement will be completed, with the annual CPP contribution rate on the yearly maximum pensionable earnings (YMPE) rising to 5.95%. At this time, there are no further planned increases to this rate. 

However, the annual review and adjustment of CPP pensionable earnings will continue. 

CALCULATION OF ENHANCED CPP 

For the years 2019 through 2023, there has been an incremental increase to the CPP contribution rate applied to the YMPE, as illustrated in the previous chart, increasing from 4.95% to 5.95%. In 2024 the additional contribution on earnings up to the AYMPE will begin. 

The Canada Revenue Agency (CRA) has indicated that the $3,500 annual CPP exemption will continue to apply, on a pay period basis, to the YMPE but not to AYMPE. 

The following chart illustrates the CPP contributions on the projected YMPE using the previous rate of 4.95%. It illustrates the enhanced portion of the contribution on YMPE and the contribution on additional earnings up to the AYMPE that will begin in 2024 

The increase to the maximum pensionable earnings for the year means some employees will contribute longer, and the contribution holiday currently enjoyed might be for a shorter duration or possibly eliminated. 

Employers will continue to match employee contributions under the new enhanced CPP program. Organizations should plan and budget for this additional expense 

Example: 

In 2022, Karthik had annual pensionable earnings of $75,000 and was paid bi-weekly. The maximum CPP contribution of $3,499.80 was reached in pay period 22 of 26, and Karthik would have enjoyed a contribution holiday for the remaining four pay periods. 

• Based on the projected AYMPE limit of $80,900 for the calendar year 2025, an employee earning $75,000 in pensionable earnings, paid bi-weekly, will have CPP contributions deducted in all 26 pay periods because the pensionable earnings are below the AYMPE for the year. 

TAX TREATMENT OF ENHANCED CPP CONTRIBUTIONS 

To help reduce the impact of these changes on taxpayers, the government treats the enhanced portion of CPP contributions as tax deductible. 

The enhanced portion of CPP contributions will include two values: 

1.  Any contributions on YMPE above the pre-enhancement contribution of 4.95% of contributory earnings. 
   • In 2022 the enhanced portion is 0.75% 
   • In 2023 the enhanced portion will be 1% 

       2. The new 4% contribution on AYMPE that will begin in 2024 

The pre-enhancement employee CPP contribution of 4.95% of pensionable income forms part of the value on which a tax credit is calculated using the lowest tax rate (the federal rate is 15%). This tax credit will continue to apply to the value that is equal to 4.95% of contributions on each year’s YMPE value. 

 From 2019 through 2022, the CRA allowed payroll to treat the enhanced portion of CPP contributions on YMPE as part of the tax credit. Then taxpayers would receive an adjustment when filing their annual Income Tax and Benefit Return.  

• Claimed on line 22215. 
• Deduction for CPP or QPP enhanced contributions on employment income. 
• The maximum for 2022 will be $460.50 

 On March 3, 2022, the Governor General in Council, on the recommendation of the Minister of National Revenue, made amendments to Subsection 100 (3), paragraph 60 (e.1) of the Income Tax Regulation, ensuring CPP additional contributions are treated as a deduction at source. These changes will come into effect on January 1, 2023. 

There will be no change to the way payroll calculates, withholds and remits CPP contributions. This change will, however, impact the calculation of net taxable income, on which federal and provincial income tax is determined. 

Example: 

Georgia has bi-weekly pensionable earnings of $4,500 for the first pay run of 2023. The CPP contribution will be: 

($4,500.00 - 134.61) * 5.95% = $259.74 

The enhanced portion of the CPP contribution will reduce taxable income when determining Georgia’s net taxable income and the required federal and provincial income tax deductions. 

In this example, the deduction for CPP or QPP enhanced contributions is calculated as: 

Pay period C/QPP contribution * (enhanced per cent of contribution ÷ CPP contribution rate) 

$259.74 * (1% ÷ 5.95%) = $43.65 

From 2023 onwards, an employee’s net taxable income will be reduced in each pay period, which includes a C/QPP contribution. 

Under this new treatment of the enhanced portion of the CPP contribution, employees who reach the maximum CPP contribution before the end of the year will also see a small increase in their income tax. 

This will increase net taxable income once the CPP contribution stops, and no enhanced portion is treated as a reduction to taxable income. 

SECOND CONTRIBUTION – STARTING IN 2024 

RELATED INFORMATION

Canada Pension Plan enhancement - Canada.ca 

KA-03507 - Method step changes required for Federal and Provincial tax calculations (2023)

Update History 

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