Canada Pension Plan (CPP) Enhancement: What It Means for You

The second phase of the Canada Pension Plan (CPP) enhancement took effect in January 2024, bringing the final increase in CPP contributions for most Canadians. This multi-year federal effort, introduced in 2016 and implemented from 2019, raises contribution rates and adjusts pensionable earnings to help Canadians secure more stable retirement income.

The 2024 changes introduce a second earnings ceiling that will affect some middle- and higher-income workers. This explainer covers what the CPP enhancement means, how contributions are calculated, who will pay more, and how freelancers and low-income Canadians are affected.

Why CPP contributions are rising

The CPP, together with Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), forms the foundation of Canada’s public retirement income system. Some workers also benefit from employer-sponsored defined benefit plans or personal retirement accounts such as registered retirement savings plans (RRSPs). Over recent decades, however, household saving rates have fallen and many employers moved away from defined benefit plans to defined contribution plans, increasing retirement income uncertainty for workers.

Faced with lower private savings and fewer guaranteed employer pensions, the federal government concluded that strengthening public retirement benefits was necessary. The CPP enhancement is designed to increase the pension income Canadians can expect to receive in retirement by raising contribution levels and extending the pensionable earnings base for higher earners.

What the CPP enhancement is

The CPP enhancement is a seven-year program with two phases. It raises contribution rates and gradually increases the amount of earnings that are pensionable. The phased approach was chosen so workers and employers could adjust to higher contributions over time rather than absorb the full cost at once.

How CPP contributions are calculated

CPP contributions are deducted from paycheques for employed Canadians and are paid directly by self-employed people when they file taxes. Each worker has a basic exemption amount—$3,500—that is not subject to CPP contributions. Earnings above that amount are subject to CPP deductions up to the year’s maximum pensionable earnings (YMPE), which functions as the first earnings ceiling. Historically, earnings above the YMPE were not subject to CPP contributions.

Before the enhancement began, the employee contribution rate was 4.95% (employers matched that amount), while self-employed Canadians paid both portions totaling 9.9%. For example, with a 2018 YMPE of $55,900, an employed person earning at or above that amount paid CPP on $52,400 ($55,900 minus the $3,500 basic exemption) at 4.95%, while a self-employed person paid the equivalent of both employer and employee shares.

The first enhancement (CPP1)

CPP1 started in 2019 and gradually raised both contribution rates and the YMPE. The 2019 contribution rate for employees began at 5.1% (10.2% for self-employed), and by 2023 the rate had reached 5.95% for employees (11.9% for self-employed) with a YMPE of $66,600. These increases boosted the retirement income future retirees will receive from CPP.

The second enhancement (CPP2)

Beginning January 2024, CPP2 introduces a second earnings ceiling (YAMPE) rather than further increasing the base contribution rate. Under CPP2, a portion of earnings above the first ceiling becomes subject to an additional contribution: 4% for employees and 8% for self-employed Canadians. This second ceiling captures a slice of income for higher earners and channels additional contributions into enhanced future CPP benefits.

For clarity, consider an example. Jameela in Edmonton earns $100,000 per year as an employee. Under the CPP1 regime in 2023 (5.95% rate and $66,600 YMPE), she would have paid $3,754.45: that is, 5.95% on $63,100 ($66,600 minus the $3,500 basic exemption). Income above the YMPE was not subject to CPP.

In 2024, with a YMPE of $68,500 and a second ceiling (YAMPE) of $73,200, Jameela’s contributions change. She pays 5.95% on the first portion of pensionable earnings ($68,500 minus the $3,500 exemption), totaling $3,867.50, plus 4% on the difference between YAMPE and YMPE ($73,200 minus $68,500 = $4,700), adding $188. Her total CPP contribution for the year becomes $4,055.50.

How much are contributions rising in 2024?

For 2024, the base CPP contribution rates remain at 5.95% for employees and 11.9% for self-employed Canadians, the same as in 2023. The YMPE for 2024 is $68,500 (with an estimated $69,700 for 2025). The new second ceiling means workers and self-employed individuals who earn above the YMPE will pay the additional 4% or 8% rate only on the portion of earnings between the first and second ceilings.

Impact on freelancers and the self-employed

Self-employed Canadians continue to pay both the employer and employee portions of CPP. That means they will pay the higher combined rate on pensionable earnings, including the CPP2 additional rate on earnings between the two ceilings. Although self-employed contributors pay more in the short term, these contributions are intended to increase their future CPP benefits. Self-employed individuals also benefit from tax measures: a federal tax credit on CPP contributions and the ability to deduct the employer-equivalent portion from taxable income.

For example, James, a freelancer in Quebec making $55,000 a year, would fall under the first ceiling and pay the prevailing self-employed rate on his eligible income. If his income rises to $80,000 in 2025, he would pay the standard self-employed rate up to the YMPE and the additional 8% rate on earnings between the YMPE and the YAMPE. In Quebec, contributors participate in the Quebec Pension Plan (QPP), which operates similarly to the CPP with comparable thresholds and contribution rules.

Effects on low-income Canadians

Most Canadians will see higher future CPP benefits because of increased contributions, but there is an important caveat for low-income seniors who rely on the Guaranteed Income Supplement. CPP payments can reduce GIS benefits through a means-tested clawback. That means low-income workers who pay into CPP and later qualify for GIS may see some of those GIS benefits reduced based on their CPP income. Conversely, Canadians who never worked and never contributed to CPP could receive most or all of their GIS benefits without a CPP-related reduction.

Newsletter

Get free MoneySense financial tips, news & advice in your inbox.

subscribe now