The 2024-2025 CPP Enhancements
By PAIP Canada staff
For working Canadians with an annual salary, the past five years have been a little more challenging. The Canada Pension Plan (CPP) which traditionally required employees and employers to each contribute 4.95% of their salary up to the Yearly Maximum Pensionable Earnings (YMPE) has seen the required rates of contribution increase. Where there was no change is in the Yearly Basic Exemption (YBE) which remained steady at $3,500. The first $3,500 of earnings do not attract CPP contributions.
Starting in 2023, the CPP contributions have increased to 5.95% of one’s salary, up to the YMPE of $66,600. The maximum contribution for each employee and employer is now $3,754.45, calculated as [5.95% ($66,600 - $3,500)]. For those who are self-employed, the total is $7,508.90.
The good news for employees and employers is the amounts contributed provide a tax incentive. For employees, the amounts provide a tax credit (which is a reduction in taxes payable), and count as an expense for employers.
The good news, is the enhancements scheduled to be introduced in 2024 and 2025 will provide a tax deduction to employees, meaning they will receive a greater financial benefit.
For the next two years, the additional contributions to the CPP will be based on income that is a specified percentage above the YMPE. The second “ceiling” will be referred to as the Yearly Additional Maximum Pensionable Earnings (YAMPE).
During the first year of these enhancements, the YAMPE will be 7% more than the YMPE, and in 2025 (and each year afterwards), it will be 14% of the YMPE. Put another way, the enhanced contributions will be based on the YMPE multiplied by 1.14 (or 1.07 for 2024).
To make things a little more palatable for taxpayers and their employers, the premiums on enhanced contributions will be no more than 8% in total. The amount will be split between the employee and the employer evenly.
And now for the math…
Since the YMPE hasn’t been established for 2024, we’re going to assume that it’s $70,000 for this example. The YAMPE would therefore be $74,900 (calculated as 1.07 x $70,000). Consider the following calculations from the perspective of an employee only. He/She earns more than the YAMPE and resides in Ontario.
The employee’s total contributions to the CPP for 2024 would be:
- ($70,000 - $3,500) x 0.0595 = $3,956.75, plus
- (0.07 x $70,000) x 0.04 = $196.00
- The total is $4,152.75
If we redo the same example for 2025 (using the same YMPE), then it would be $79,800 (calculated as 1.14 x $70,000). The 2025 contributions to the plan would be:
- ($70,000 - $3,500) x 0.0595 = $3,956.75, plus
- (0.14 x $70,000) x 0.04 = $392.00
- The total is $4,348.75
Any taxpayer who earns more than the YAMPE will contribute the maximum to the CPP.
Factoring in the combined federal and Ontario personal tax credit rate of 20.05% on the basic contributions, and the tax savings rate of 33% on the enhanced contributions effectively reduces the after-tax cost of these contributions.
Tax Consequences
When considering the base contributions of $3,956.75 and the tax credit it provides, we know that the taxpayer will save a minimum of $593.51 in taxes payable (calculated as $3,956.75 x 15%). Remember: tax credits generally carry a 15% conversion factor for federal purposes. In addition, in Ontario (as an example), the tax credit would be an additional 5.05%. In total, the tax savings would be $793.33 (if the taxpayer resided in Ontario).
Regarding the additional contributions of $196.00 (in 2024) or $392.00 (in 2025), the taxpayer would save a total of $857.02 (in 2024) or $922.68 (in 2025), calculated as their MRT multiplied by $4,900 or $9,800.
We arrived at $857.02 as follows: $793.33 + ($196 x 33%).
We arrived at $922.68 as follows: $793.33 + ($392 x 33%).
For 2024, the after-tax expense for CPP contributions (given the assumptions above) is $3,295.73 (calculated as $4,152.75 - $857.02).
For 2025, the after-tax expense for CPP contributions (given the assumptions above) would be $3,462.07 (calculated as $4,348.75 - $922.68).