What is the Canada Pension Plan (CPP)?

Make sure you are compliant with your payroll source deductions. Employers and employees need to pay CPP in Canada.
CPP form in a desk with money saved in a jar
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Written by
Psyche Castillon
Published on
October 3, 2022

CPP is one of the most important parts of the Canadian retirement system. We’ll explain how it works and what you and your employees need to know.

Content at a glance

    The Canada Pension Plan, known simply as "CPP", forms part of the Canadian government's retirement income system. Companies with employees in Canada need to understand the country's pension system and its requirements when running payroll.

    Likewise, employees working in Canada can benefit from having at least a basic knowledge of the pension system so they can maximize the benefits it offers. We'll take a look at how CPP works in Canada.

    What is the Canadian Pension Plan?

    CPP is a government-run system responsible for supplementing the income of Canadians in their later years. CPP works alongside Old Age Security ("OAS"), which is the primary government-administered pension benefit.

    CPP payroll contributions are mandatory for most working Canadians and their employers. Every pay period, employees must contribute a portion of their earnings to CPP, up to a maximum annual amount. Self-employed individuals must also contribute based on their net business income.

    Employers are responsible for contributing a matching amount to CPP each pay period as well. Employers are responsible for deducting and remitting the employer and employee contributions to the Canada Revenue Agency ("CRA").

    Contributions made to CPP are managed by the CPP Investment Board, a Crown corporation whose sole responsibility is to manage one of the largest funds in the world, with over $523 billion in assets under management.

    When employees reach retirement age, usually between the ages of 65 and 60, they can apply for CPP benefits in the form of monthly income.

    How CPP works in Quebec

    As with many things in Canada, Quebec operates with a separate but similar system. Rather than contributing to CPP, employees and employers in Quebec contribute to the Quebec Pension Plan, or "QPP". QPP contributions are remitted to Revenu Québec instead of the CRA. Other than that, for the most part the concept is the same. We'll point out any significant differences as we go along.

    Who has to contribute to CPP?

    Virtually all employment in Canada, including self-employment, is known as pensionable employment, meaning that CPP deductions and contributions apply. Therefore, CPP contributions also apply to virtually all companies employing people in Canada, regardless of whether those employees are citizens or not. Employers must deduct CPP contributions from an employee's earnings if that employee meets all the following conditions:

    1. the employee is in pensionable employment during the year,
    2. the employee is not collecting a disability pension under CPP, and
    3. the employee between 18 and 69 years old, even if the employee is receiving a CPP retirement pension.

    The one exception to this is if an employee is at least 65 years old but under the age of 70, that employee can opt out of paying CPP contributions by filling out a form known as Form CPT30 with their employer.

    How CPP deductions and contributions are calculated

    Deductions and contributions to CPP are based on the employee's earnings during the year. These earnings are called pensionable earnings. The contribution rate, or the proportion of earnings that an employee and employer must contribution, and the maximum amount of contribution change every year as the average wage increases in Canada.

    The maximum pensionable earnings amount for 2022 is $64,900, meaning that CPP must be contributed for the first $64,900 in earnings. The contribution rate for both employees and employers is 5.70% each, and there is a base exemption amount of $3,500 per year.

    Putting this all together, the most an employee will be required to contribute to CPP in 2022 is ($64,900 - $3,500) × 5.70% = $3,499.80. The contribution rate for employers is the same, and thus the most an employer will contribute to CPP for each employee in 2022 is also $3,499.80.

    As a further example, suppose an employee is paid $3,000 semi-monthly (twice per month), with 24 pay periods per year. That translates to an annual salary of $72,000. The CPP contribution for the pay period would be ($72,000 - $3,500) × 5.70% ÷ 24 = $162.69. The employer must therefore deduct $162.69 from the employee, contribute an additional $162.69 itself, and remit $325.38 to the CRA for that pay period.

    Note that even though the employee's annualized earnings are higher than the maximum pensionable earnings, they must contribute CPP each pay period based on their actual annualized earnings until they reach the maximum contribution amount for the year of $3,499.80 from the employee, or $6,999.60 in total contributions from both the employee and employer. Self-employed individuals contribute the entire amount of CPP from net business income (after expenses).

    Contributions and deductions under the QPP

    The contribution rate for QPP is higher than that of CPP, at 6.15% in 2022. Unlike CPP, contributions to QPP are remitted to the province's Revenu Québec (ARQ) and are managed by the Caisse de dépôt et placement du Québec.

    There are certain nuances when a company transfers an employee from another province or territory to Quebec or vice versa. In this case, there is a formula that is used to reconcile the contributions in the two pension plans and the employer must make sure that enough contributions to CPP are withheld, future benefits are not affected, and that two T4 slips are prepared at the end of the year.

    CPP benefits

    Similar to the U.S. Social Security system, CPP provides several types of benefits to people who have contributed:

    1. Retirement pension. Full CPP retirement benefits start at age 65. The employee may apply as early as age 60 with a permanently reduced benefit amount, or as late as age 70 with a permanently increased benefit amount.
    2. Post-retirement benefit. Between the ages of 60 and 70, if the employee keeps working while receiving a CPP retirement pension, the employee can continue to contribute to CPP which goes toward post-retirement benefits that increase their retirement income.
    3. Disability benefits. Employees under 65 who cannot work due to a disability can get disability benefits.
    4. Survivor's pension for spouses or common-law if the employee dies.
    5. Children's benefits for children up to age 18, or 25 if they are studying, if the employee dies or becomes severely disabled.
    6. A one-time death benefit to the employee's beneficiaries if the employee dies.

    The amount of CPP benefits is calculated based on the number of years of contribution and the amount of contribution in the 40 highest earning years. To receive the maximum CPP benefit, individuals must have contributed the maximum amount to CPP for each of those 40 years. In 2022, the average monthly payment at age 65 was $727.61 and the maximum monthly payment was $1,253.59.

    CPP aims to replace between 25% and 33% of an employee's average work earnings, and both contributions and benefits are expected to increase in the future. Employees should note that CPP benefits are taxable income.

    Applying for CPP benefits

    To receive pension benefits under CPP, the individual must be at least 60 years old and must have made at least one valid contribution to CPP throughout their life.

    Benefits are not automatically given to employees and when eligible, employees must apply either online or on paper to Service Canada. In addition to being of the age of eligibility and have made a valid CPP contribution, employees must have a Social Insurance Number, or SIN, in Canada.

    Social security of other countries

    Canada has social security agreements with more than 50 countries, including the United States. This is to reduce the instances where the employee will be making contributions to two pension systems. Similar to CPP, most people employed in the United States must pay into the country's Social Security system.

    Canada's government-run pension plans can be confusing for foreign businesses especially when the intention is to run payroll in different provinces. While Canada has social security agreements with other countries, like the United States, it still important for foreign businesses to carefully understand the requirements of CPP and/or QPP.

    Plan with Thirdsail

    You need an efficient and compliant payroll solution to hire the best employees in Canada. Thirdsail is here to help.

    Thirdsail helps companies around the world hire employees in Canada. We help you hire employees instantly without having to open a subsidiary and make sure your employees have all the right deductions and contributions.

    Learn more about how we can help you hire in Canada. If you have questions and would like to learn more about hiring employees across borders, get in touch today.

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