Understanding CPP Contributions: A Guide for Canadian Taxpayers

The Canada Pension Plan (CPP) is an essential part of the Canadian retirement system, designed to provide income for individuals when they retire. For most working Canadians outside of Quebec, making contributions to CPP is mandatory. This guide will help you understand who needs to contribute, how contributions are made, and what changes are coming in 2025.

Who Needs to Contribute to CPP?

With few exceptions, every individual over 18 who works in Canada (excluding Quebec) and earns more than $3,500 per year must contribute to CPP. If you earn below this threshold, you are exempt from CPP contributions.How Do You Make Contributions?

Your employer automatically deducts CPP contributions from your paycheck and remits them to the Canada Revenue Agency (CRA). Employers match your contributions dollar for dollar.

For self-employed individuals, contributions are made when filing your T1 income tax and benefit return using Schedule 8. The contribution amount is based on your net business income, and you do not contribute on other types of income, such as investment earnings.

If you overcontribute or earn less than the minimum threshold, any excess amount will be refunded when you file your tax return.

How Much Do You Contribute?

Contributions are based on annual earnings that fall between a minimum and a maximum amount. The maximum, known as the Year’s Maximum Pensionable Earnings (YMPE), is set annually by the government based on average wage growth in Canada.

Starting January 1, 2024, an additional earnings ceiling, the Year’s Additional Maximum Pensionable Earnings (YAMPE), was introduced. Individuals earning above the YMPE will make additional CPP contributions on income up to the YAMPE. This enhancement, called CPP2, is part of a broader effort to strengthen retirement benefits.

What Do Employees Need to Do?

For most employees, CPP contributions are automatically deducted from their pay. However, at tax time, contributions must be categorized into base CPP, first additional CPP, and CPP2 (starting in 2024).

• Base contributions (4.95%) and first additional contributions (1%) appear in Box 16 on your T4 slip.
• CPP2 contributions (if applicable) will appear in Box 16A starting with the 2024 tax year.
• You can claim a 15% non-refundable tax credit for base CPP contributions.
• The enhanced portions, including first additional and CPP2 contributions, qualify for a tax deduction.

For electronic filers: Tax software certified for NETFILE will handle these calculations automatically.

For paper filers: The CRA’s forms, including Schedule 8/RC381, will guide you in calculating your base and enhanced contributions.CPP Contribution Rates and Maximums for 2025

Each year, the government adjusts CPP thresholds and rates. Here are the key figures for 2025:

CPP Base Contributions:

• YMPE: $71,300 (up from $68,500 in 2024)
• Basic Exemption: $3,500
• Employee and Employer Contribution Rate: 5.95%
• Maximum Employee and Employer Contribution: $4,034.10 (up from $3,867.50 in 2024)
• Self-Employed Contribution Rate: 11.90%
• Maximum Self-Employed Contribution: $8,068.20 (up from $7,735.00 in 2024)

CPP2 Contributions:

• YAMPE: $81,200 (up from $73,200 in 2024)
• Pensionable Earnings Subject to CPP2: Between $71,300 and $81,200
• Employee and Employer CPP2 Contribution Rate: 4.00%
• Maximum Employee and Employer Contribution: $396.00 (up from $188.00 in 2024)
• Self-Employed CPP2 Contribution Rate: 8.00%
• Maximum Self-Employed Contribution: $792.00 (up from $376.00 in 2024)

Whether you’re an employee or self-employed, understanding your CPP contributions ensures you’re prepared for tax time and future retirement benefits. If you have questions, consider consulting a tax professional at Koroll & Company. We pride ourselves on delivering value to all our clients, and providing up-to-date expertise and knowledge.