In 2024, the Canada Pension Plan (CPP) underwent several enhancements aimed at improving retirement security for Canadians. These enhancements include adjustments to contribution rates, benefit calculations, and eligibility criteria. The goal of the enhancements is to ensure that Canadians have access to higher benefits and greater financial stability through a small increase in the amount they contribute to the CPP.
What is the CPP Enhancement?
The CPP is a high-quality savings tool that provides a guaranteed, secure monthly income stream to Canadian workers when they retire. The CPP retirement benefit currently replaces a maximum of 25% of earnings, up to the Year's Maximum Pensionable Earnings (YMPE), which approximates the average Canadian wage and is indexed to average wage growth annually. An individual's benefit is computed based on his or her actual earnings and contributions history.
Starting in 2019, the federal government began gradually enhancing the CPP. They’re doing it so that today’s workers, by contributing a bit more to the CPP, will have higher benefits and greater financial stability when they become seniors in the future.
The CPP enhancement only affects those who work and contribute to the CPP in 2019 or after. It adds 2 additional top-up amounts to the base CPP.
The CPP now consists of:
- The base (or original CPP)
- The first additional component phased in between 2019 and 2023
- The second additional component to be phased in between 2024 and 2025
The CPP enhancement will increase the amount working Canadians receive in the CPP retirement pension, post-retirement benefit, disability pension, and survivor’s pension. It will not affect eligibility for CPP benefits.
If you contribute to the QPP, a similar enhancement may affect you.
An Overview of the Proposed CPP Enhancement
Recap of CPP changes from 2019 to 2023
CPP saw rates increase incrementally from 4.95% in 2019 to 5.95% in 2023. This included the introduction of tax deductions for enhanced contributions.
- Contributions based on the 4.95% contribution rate are considered base contributions and result in a non-refundable tax credit which is applied during an employee's annual tax return.
- Contributions greater than the 4.95% contribution rate are considered enhanced contributions and are tax-deductible, meaning that when the pay is processed there is a reduction to pensionable earnings.
CPP 2023 and beyond
On November 1, 2023, the CRA announced the maximum pensionable earnings and contributions for 2024.
Year’s Maximum Pensionable Earnings (YMPE) & Year’s Additional Maximum Pensionable Earnings (YAMPE)
The Year’s Maximum Pensionable Earnings (YMPE) determines the maximum amount on which CPP contributions are calculated. Starting in 2024, the CPP enhancement will indeed introduce a new, higher earnings limit. This limit is known as the year’s additional maximum pensionable earnings (YAMPE).
Starting in 2024:
- YMPE will be referred to as the first earning ceiling
- The maximum pensionable earnings under CPP will be $68,500, up from $66,600 in 2023
- The basic exemption amount for 2024 remains at $3,500
- Year’s Additional Maximum Pensionable Earnings (YAMPE) will be referred to as the second earning ceiling
- YAMPE will be the new limit up to which earnings are considered pensionable
- Starting in 2024, a higher, second earnings ceiling of $73,200 will be implemented and used to determine second additional CPP contributions (CPP2). As a result, pensionable earnings between $68,500 and $73,200 are subject to CPP2 contributions.
Second CPP Contributions
Second CPP contributions will have a different contribution rate. This new rate will be 4% for employees and employers, and 8% for self-employed individuals.
- Base CPP Contributions: Also known as the original CPP with a rate of 4.95%
- First CPP Contributions: Contributions above the 4.95%, phased in between 2019 and 2023.
- Base + First Contributions = 5.95%
- Second CPP Contributions: Contributions above the YMPE at the rate of 4%.
- The second earning ceiling will be 7% higher than the first earning ceiling in 2024; then 14% higher in 2025, where it will remain at this level for the foreseeable future
How the CPP Enhancement Works
With the CPP enhancements for 2024, it’s important to understand how the changes impact contributions. Let’s simplify the calculation to see the real-world effects.
Before 2024 CPP Enhancement - 2023 Scenario:
- Original Maximum Pensionable Earnings (YMPE):$66,600.
- Employee CPP Contribution Rate:95%.
- John’s CPP Contribution for 2023: $66,600 × 5.95% = $3,962.70 (since his earnings exceed the YMPE, he contributes the full pensionable amount).
After 2024 CPP Enhancement
Scenario 1 – Earnings are More than the First Earnings Ceiling
John earned $90,000 as an employee.
*Yearly CPP exemption is $3,500
**The first earning ceiling is $68,500
***The second earning ceiling is $73,200
Step 1:
Since John's earnings are more than the first earnings ceiling, we take the first earnings ceiling amount** and subtract the yearly CPP exemption*.
$68,500 - $3,500 = $65,000
Multiply by 5.95%, the first ceiling contribution rate.
$65,000 x 0.0595 = $3,867.50
$3,867.50 will be her first CPP contribution. If this was in 2023, this is where we would stop. That would be his total contributions that would go in box 16. However, in 2024, there is an extra step.
Step 2:
Next, because John's earnings are more than the second earnings ceiling***, we will then take the second earnings ceiling and subtract the first earnings ceiling from it.
$73,200 -$68,500 = $4,700
Multiply this amount by 4%, which is the contribution rate for any amounts above the first earnings ceiling but below the second earnings ceiling.
$4,700 x 0.04 = $188
$188 will be his second CPP contribution.
Adding both the first and second CPP contributions together will give a total CPP contribution for 2024
$3,867.50 + $188.00 = $4,055.50.
Therefore, in 2023, John’s CPP contribution would be $3,962.70, and in 2024, her total CPP contribution would increase to approximately $4,055.50 due to his qualifying for the second phase of the CPP enhancements.
What does this mean for John’s T4?
- Box 14 will remain the same at $100,000
- Box 16 will be the first CPP contribution of $3,867.50
- New Box 16A will be the second contribution of $188
Box 26 (Pensionable Earnings) will be $73,200 (the first ceiling and second ceiling combined will be reported in this box)
Scenario 2 – Earnings are Below the First Earnings Ceiling
John earned $55,000 in 2024 as an employee.
*Yearly CPP exemption is $3,500
**The first earning ceiling is $68,500
***The second earning ceiling is $73,200
Step 1:
Because John’s earnings are below the first earnings ceiling, we first take John's earnings and subtract the $3,500 exemption.
$55,000 - $ 3,500 = $51,500
Multiply by the 5.95%, the first ceiling contribution rate.
$51,500 x 0.0595 = $ 3,064.25
This gives us a total of $ 3,064.25 which is the maximum John will contribute to the Canada Pension Plan for 2024 since his earnings are below the second earnings ceiling.
Step 2:
For John, his earnings are below the second earning ceiling, therefore no more calculations are required. John will not make any second contributions to the Canada Pension Plan.
John’s total CPP contributions for 2024 will be $3,064.25.
What does this mean for John’s T4?
- Box 14 will be $55,000
- Box 16 will be the first CPP contribution of $3,064.25
- New Box 16A will be $0.00
- Box 26 (Pensionable Earnings) will be $55,000
Note: These calculations are based on the CPP enhancement details provided by the Canada Revenue Agency for the year 2024. For official figures, please see the tables on the CRA Enhancement Plan.
Why is the CPP enhancement necessary?
There are many reasons why the CPP enhancement is necessary:
- To reduce the number of families at risk that haven’t saved enough for retirement.
- The effect of inflation and the cost of living on retirement income.
- Younger workers are facing challenges that make saving for retirement more difficult.
- Pensions have changed to defined contribution plans from defined benefit plans.
Expanded Benefits
To provide better retirement income, the CPP now offers enhanced benefits, including:
- Higher Replacement Rate: The replacement rate has been increased from 25% to 33.33% of the average earnings during a worker's career.
- Increased Maximum Pensionable Earnings: The maximum amount of earnings covered by the CPP has been raised, allowing higher-income earners to contribute more and receive higher benefits.
- Additional Yearly Contributions: The enhancements include provisions for an additional yearly maximum pensionable earnings (YMPE) beyond the regular YMPE, contributing to higher future benefits.
Targeted Benefits for Low-Income Workers
The enhancements include specific measures to support low-income workers, ensuring they receive proportionately higher benefits relative to their contributions. This includes:
- Dropout Provisions: Continued support for dropout provisions, such as child-rearing and disability dropouts, to ensure that periods of low or no earnings do not disproportionately affect benefits.
- Post-Retirement Benefits: Improved post-retirement benefits for those who continue to work after starting to receive CPP benefits, allowing them to increase their retirement income.
Enhanced Survivor and Disability Benefits
In addition to retirement benefits, the CPP enhancements also include improved survivor and disability benefits:
- Higher Survivor Benefits: Increased benefits for surviving spouses and dependent children, providing better financial security.
- Enhanced Disability Benefits: Improved support for individuals who become disabled before retirement, ensuring they receive adequate income support.
Conclusion
The 2024 enhancements to the Canada Pension Plan are designed to provide better financial security for Canadian retirees, while also ensuring the plan remains sustainable for future generations. These changes reflect the government's commitment to adapting the CPP to the evolving needs of the workforce and the aging population.
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Frequently Asked Questions
1) What is the CPP enhancement for 2024?
The CPP enhancement for 2024 introduces a new, higher earnings limit, known as the year’s additional maximum pensionable earnings. This limit will be 7% higher than the original year’s maximum pensionable earnings.
2) Has CRA officially announced/confirmed the YMPE and YAMPE numbers yet?
Yes, as of November 1, 2023, the CRA has announced the YMPE and YAMPE numbers for 2024, and you can find them here.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.