Originally published October 10, 2023
In business, financial responsibilities can often seem like a maze – overcomplicated, intricate, and never-ending. One labyrinth that business owners must navigate is Canada Pension Plan (CPP) contributions. Although not glamorous, CPP contributions are the key to financial security and peace of mind.
The question is: how do you calculate CPP contributions, and what's your role when it comes to remittance? This post will simplify the calculation process and provide an overview of what's expected when making your CPP contributions as an employer or as a self-employed individual.
How Do You Calculate CPP Contributions?
As a business owner or self-employed individual, you must understand how to calculate CPP contributions. It’s also important to ensure that you are up-to-date with the latest changes as part of the CPP enhancement initiative.
As of January 1, 2024, a second earnings ceiling has been introduced, known as the Year's Additional Maximum Pensionable Earnings (YAMPE). Employees and employers will contribute an additional 4% in earnings above the first earnings ceiling, up to the amount of the second earnings ceiling. For 2024, the first earnings ceiling is $68,500, and the second earnings ceiling is $73,200.
Please note: contributions for 2025 are currently estimated at $69,700 for the first earnings ceiling and $79,400 for the second earnings ceiling.
This means that your CPP contributions will be separated into two parts: a CPP base alongside first additional CPP contributions as well as CPP2 contributions, which will be paid from the first ceiling of contributions to the next.
If you are self-employed, the CPP base and first additional contributions will be calculated at a rate of 11.9%. CPP2 will be calculated at rate of 8% of income earned between the first and second ceiling.
If you are an employee, the CPP contribution base and first additional contributions will be calculated at a rate of 5.95%. CPP2 will be calculated at a rate of 4% of income earned between the first and second ceiling.
Only individuals who make over the threshold of the first ceiling will have to make CPP2 contributions.
If, for example, you’re a self-employed individual in 2024 and your annual earnings are $80,000, you would need to take into account your first and second contributions, which are calculated as follows:
First CPP Contribution
($68,500 - $3,500) x 11.9% = $7,735.00
Second CPP Contribution
($73,200 – $68,500) x 8% = $376.00
Total Contributions for 2024 = $8,111.00
What are Canada Pension Plan Contributions?
CPP is a government-mandated earnings-based social program designed to protect the contributor and their families against the loss of income associated with death, disability, or retirement.
As a business owner, not only are you responsible for withholding CPP contributions for your employees, but you must also make an additional contribution as an employer. If you’re self-employed, you’re responsible for making both an employee and employer contribution.
When are CPP Contributions Due?
If you’re self-employed, you will remit your CPP contributions when you file your T1 Tax return, as your contributions will based on your net business income.
If you’re an employer with employees, you must remit deductions to the Canada Revenue Agency as part of your payroll deductions. If your Average Monthly Withhold Amount is less than $25,000, you'd be classified as a regular remitter, and you would need to remit deductions to the CRA before the 15th day of the month after the month you paid your employees. For more information regarding remittances of CPP, please speak to a professional or refer to CRA’s Payroll Deductions and Remittances Guide.
What's Next?
CPP and government programs don’t need to be scary or complicated – it’s all about being in the know and keeping up-to-date with the changes and your obligations as an employer or self-employed individual.
The first step would be to determine your current obligations based on your situation and start preparing for the amounts due come tax time. This will alleviate a lot of stress when you're faced with a hefty bill.
If you're an employer, ensure you've set up a good system for your payroll deductions. If you're unsure where to start with your CPP deductions or want to get them off your plate, contact us today for a free consultation!