Canada Pension Plan Enhancement
As of 2019, the Canada Pension Plan (CPP) is gradually being enhanced. This means that today’s workers, the seniors of tomorrow, will have higher benefits and greater financial stability through a small increase in the amount they contribute to the CPP.
The CPP enhancement only affects those who work and contribute to the CPP in 2019 or after.
The enhancement adds 2 additional components to the CPP. These components are not a separate benefit, but a ‘top-up’ to the base CPP.
The components of CPP contributions:
CRA referred to the CPP contributions payable under the pre-enhancement CPP model as the base contributions. The base contributions are calculated as 4.95% of the employee’s earnings, to a maximum of the year’smaximum pensionable earnings (YMPE), less the $3,500 basic exemption.
The next component was referred to as first enhanced CPP contributions by CRA. These contributions commenced in 2019 and are calculated as a percentage of the same amount of earnings as the base contributions. The rate of contributions was phased in and reached the full 1% in 2023.
The final component, referred to by CRA as second enhanced CPP contributions, will commence in 2024. The contribution rate will be 4%, and it will be applied to earnings above YMPE up to the yearly additional maximum pensionable earnings (YAMPE) ceiling. For 2024, YAMPE will be set at a number 2023 7% higher than YMPE, and it is estimated to be $72,400. For subsequent years, YAMPE will be 14% higher, and it is estimated to be $79,400 for 2025.
The CPP enhancement will increase the amount working Canadians receive in the CPP retirement pension, post-retirement benefit, disability pension and survivor's pension. It will not affect eligibility for CPP benefits.
Effects on the CPP retirement pension and post-retirement benefit
The enhancement means that the CPP will begin to grow to replace one third (33.33%) of the average work earnings you receive after 2019. The maximum limit of earnings protected by the CPP will also increase by 14% between 2024 and 2025.
Your pension will increase based on how much and for how long you contribute to the enhanced CPP. The CPP enhancement will increase the maximum CPP retirement pension by more than 50% for those who make enhanced contributions for 40 years.
The enhancement also applies to the CPP post-retirement benefit. It will be higher if you:
are receiving the CPP (or QPP) retirement pension, and
continue to work and make CPP contributions in 2019 or later
Credit or deduction
For the employee, base CPP contributions are eligible for a 15% nonrefundable tax credit (plus any relevant provincial credit) while the enhanced portions (both first and second enhanced CPP contributions) are deductible. This means that the enhanced portion will generate tax savings at the employee’s marginal tax rate. Starting in 2024, both base CPP contributions and first enhanced CPP contributions will continue to be reported in box 16 of the T4, while second enhanced CPP contributions will be reported in soon-to-be-introduced box 16A.
For employers, all contributions (both base and enhanced portions) are deductible.
The payout
The enhanced portion of CPP payouts will only be available to those that have contributed since the enhancements were introduced in 2019. Employees that have fully participated under the enhanced contribution