Contents
Last updated: Oct. 1, 2024
CPP Enhancement 2024: A Comprehensive Guide for Employers
What is the CPP Enhancement?
The Canadian Pension Plan (CPP) enhancement significantly increases pension contributions from employers, employees and self-employed individuals.
The goal of the CPP enhancement, once mature, is to increase the maximum CPP retirement pension by about 50% along with other benefits, such as survivor and disability pensions.
According to the CRA’s Backgrounder, “Enhancing the CPP will significantly reduce the number of Canadian families at risk of not saving enough for retirement, particularly those who do not have a workplace pension plan.”
The first round of enhancements began in 2019. However, January 1, 2024, kicked off the second tier of contributions (CPP2) for higher-income earners.
A Closer Look at CPP2 for Employers: 2024 to 2025
Under the CCP2, higher-income earners pay additional CPP contributions on top of the regular or base CPP they already pay.
Here is how it works:
- First Earnings Ceiling: This is the year’s maximum pensionable earnings (YMPE) or the maximum income level subject to base CPP. In 2024, it’s $68,500.
- Second Earnings Ceiling: This is the year’s additional maximum pensionable earnings (YAMPE) or the maximum additional level of income subject to the CPP2. In 2024, it’s $73,200, and it will increase by approximately 14% in 2025.
In their Backgrounder, the CRA said that for 2026 and beyond, both ceilings will increase incrementally each year. Still, the contribution rates (the percentages applied to the calculation) will likely remain the same.
Understanding CPP Enhancement Calculations
The CPP2 rate is calculated based on a percentage of the income earned between the first and second earnings ceilings. The CCP2 contribution rates are:
- 4% for both employers and employees
- 8% for self-employed
If you have an employee who earns more than the first ceiling but less than the second ceiling, the same contribution rates apply to both of you. Here is an example table from the CRA:
| Year | Employee / Employer Contribution Rate Split | First Earnings Ceiling (YMPE) | Second Earnings Ceiling
(YMPE) |
Employee / Employer Maximum Yearly CPP2 Contribution |
| 2024 | 4% | $68,500 | $73,200 | $188 |
| 2025 | 4% | $69,700
(estimated) |
$79,400
(estimated) |
$388
(estimated) |
Let’s apply these calculations to some real-world scenarios.
Scenario 1 – Emma Earns $85,000
Your employee, Emma, earns $85,000 and is subject to CPP2. Let’s do the base and first additional CPP calculations separate from CPP2 and then add them together for the total. For accuracy, we will subtract the basic exemption amount of $3,500 before applying the CPP contribution rate, as you would do with all employees.
- Calculating CPP contribution on income below the first earnings ceiling.
| Year | Employee / Employer Contribution Rate Split | First Earnings Ceiling | Second Earnings Ceiling | Emma’s annual CPP contributions at 5.95% |
| 2024 | 5.95% | $68,500 | $73,200 | ($68,500 – $3,500) × 5.95% = $3,868 |
| 2025 | 5.95% | $69,700
(estimated) |
$79,400
(estimated) |
($69,700 – $3,500) × 5.95% = $3,939 (estimated) |
- Calculating CPP2 on income above the first earnings ceiling and below the second earnings ceiling.
| Year | Employee / Employer Contribution Rate Split | First Earnings Ceiling | Second Earnings Ceiling | Emma’s annual CPP2 contributions at 4% |
| 2024 | 4% | $68,500 | $73,200 | ($73,200 – $68,500) × 4% = $188 |
| 2025 | 4% | $69,700
(estimated) |
$79,400
(estimated) |
($79,400 – $69,700) × 4% = $388 (estimated) |
- Emma’s total contributions:
| Year | First contribution amount | + CPP2 contribution amount | = Total annual CPP contribution |
| 2024 | $3,868 | $188 | $4,056 |
| 2025 | $3,939 (estimated) |
$388 (estimated) |
$4,327 (estimated) |
As an employer, you will match Emma’s contributions, but remember, both CPP and CPP2 contributions are tax deductions for your business.
Scenario 2 – Josh Earns $65,000
In this example, your employee Josh earns $65,000, which is below the first earnings ceiling. This means he is not subject to CPP2, so we’ll only need to calculate the base and first additional CPP contributions. Again, we’ll subtract the basic exemption amount of $3,500 before applying the CPP contribution rate.
- Calculating CPP contribution on income below the first earnings ceiling.
| Year | Employee / Employer Contribution Rate Split | First Earnings Ceiling | Second Earnings Ceiling | Tom’s annual CPP contributions at 5.95% |
| 2024 | 5.95% | $68,500 | $73,200 | ($65,000 – $3,500) × 5.95% = $3,659.25 |
| 2025 | 5.95% | $69,700
(estimated) |
$79,400
(estimated) |
($65,000 – $3,500) × 5.95% = $3,659.25 (estimated) |
As you can see, for employees making less than the first earnings ceiling, base CPP is calculated the same way.
CPP2 Payroll and Tax Obligations for Employers
As an employer, you must calculate, withhold and remit CPP2 contributions as you would with base and first additional CPP contributions. There are, however, some additional requirements you need to know:
- Update the Earnings Ceilings for Payroll Each Tax Year
Before setting up your payroll for each new tax year, use the correct earnings ceilings. As a reminder, while the percentages used to calculate CCP and CPP2 are unlikely to change, the maximums or earnings ceilings will increase each year.
The new ceilings are announced every November by the CRA – so make sure you’re using the correct maximums before applying payroll deductions.
If you use the CRA Payroll Deductions Online Calculator, these amounts will automatically be updated. A word of caution when using the CRA online calculators: you need to clear your caches and keep your software up to date to ensure they function properly. Again, when using any online payroll deduction calculators, it is good practice to double-check your calculations for accuracy.
2. T4 Slips
While you don’t have to break out CPP2 contributions separately on employee paystubs, you do have to enter CPP and CCP2 amounts separately onto employee T4 slips:
New CPP and CPP2 T4 Slip Requirements for 2024 and Beyond
- Report employee base and first additional CPP contributions in Box 16.
- Report employee CPP2 contributions in Box 16A.
3. Talk to Your Employees About ALL the CPP Benefits
No one is ever happy paying more taxes and while it may not be an “official” payroll or tax obligation, helping your employees understand where that extra deduction is going may give them peace of mind.
We all tend to view CPP as only an expense for a business or a tax personally, lumping payments made to CPP with income tax or GST/HST. It is vastly different and should be viewed as payments made towards a personal future savings account.
CPP contributions are comparable to RRSPs but with several key differences. It is aptly titled “Canada Pension Plan” because it is meant to serve as a pension for those of us who cannot contribute to a pension otherwise.
Many business owners could also benefit from making contributions. Beyond providing retirement income, CPP helps individuals who experience unexpected hardship in the following ways:
-
- This is a monthly payment made to eligible individuals if they cannot work due to a disability.
-
- The individual must be under the age of 65 and must have contributed sufficiently to the CPP.
-
- The individual must have developed a long-term or unknown duration mental or physical disability which prevents them from being able to work.
-
- If an individual is receiving the disability benefit, any dependent children under the age of 18 (or under the age of 25 if attending school full-time) may also receive a monthly payment.
-
- Upon death, a one-time payment to aid with funeral and other costs.
-
- The deceased must have contributed to CPP for a sufficient period to qualify.
-
- This is a monthly payment made to the spouse or common-law partner of a deceased CPP contributor.
-
- This is a monthly payment made to the dependent children of a deceased CPP contributor.
CPP2 Enhancements: Increased Contributions, Higher Benefits
While CPP2 enhancements are a significant change, the primary goal is to provide Canadians with a larger pension and increased CPP benefits.
It’s important to note, however, that the enhancement will only benefit those who started working and contributing in 2019 or later – when the first round of enhancements began. And by extension, younger Canadians who just started in the workforce will ultimately see the most significant benefit from the enhancement. At the same time, those closer to retirement age will only receive a slight increase.
Whether you’re just starting or hoping to retire soon, it’s never too late to create a financial plan and tax strategy to help you maximize tax savings and ensure a comfortable retirement.
Free Download: The Ultimate Guide to Tax Planning and Preparation
For Canadian farmers, contractors, and small business owners, tax planning and preparation aren’t once-a-year events. They require an ongoing strategy focused on meeting today’s goals and building wealth for the future.
To help you get started, we created the Ultimate Guide to Tax Planning and Preparation for the Canadian Farmer, Contractor, and Small Business Owner. This comprehensive resource offers deeper insight into tax planning and preparation.
About FBC
For more than 70 years, we have helped hard-working Canadian small business owners, farmers, and agricultural producers save time and money by connecting them to a people-powered network of tax, bookkeeping, payroll and financial planning experts.
We deliver industry-specific support for your business that helps maximize your tax savings, simplify your books and manage your payroll. Our paralegal team can get your business incorporated and file your minute books and annual returns. Our financial and estate planning team can help you manage your wealth and plan your transition to retirement.
Take 15 minutes to connect with us. Let’s see if we’re a good fit for you and your business. Book online or call us at 1-800-265-1002.
