We have all experienced the discouragement of receiving our paycheque and seeing that a huge chunk of our money has been lost to taxes and other deductions. For some reason, the government provides no formal education on any of the various processes relating to taxes, pensions, or other related topics (why isn’t this part of the school curriculum?). 


As a result, many of us must do our own research in order to properly understand the tax process and all of the other deductions coming off of our income. Aside from tax, the biggest and most common deduction off a standard paycheque is from the Canadian Pension Plan (CPP). 


What is CPP?

The CPP is a pension plan designed to replace some of your income upon retirement through a monthly benefit. Through this program, Canadian taxpayers make contributions throughout their working life and receive this money back as a monthly pension when they decide to apply for CPP. 


In this sense, it is nice to realize that at least some of the money being deducted off of our paychecks eventually comes back to us in the long run. 


How it works

The amount deducted off of your pay each year for CPP is determined by your employment income. 


  • The minimum yearly income threshold for CPP contributions is $3,500, so taxpayers receive no CPP deductions on their first $3,500 of income. 


  • The maximum threshold for CPP contributions is $58,700, so taxpayers will not have CPP deducted on income earned beyond this amount. 


Let me break it down in detail for easier understanding:


Someone making $120k a year will contribute the same amount to CPP as someone making $58k a year. In 2020, the CPP contribution rate was increased to 5.25% of employment income, as it continues to rise each year. 


This means that taxpayers receiving employment income and a T4 will contribute 5.25% of their earnings between $3,500 and $58,700 to CPP in 2020, for a maximum yearly contribution of $2,898. (Note that this is for those receiving a T4 as contributions are different for self-employed tax payers).


CCP: If you are an employee

The nice thing about being an employee is that your employer is actually responsible for matching this yearly contribution to your pension plan. In other words, you have actually contributed $5,796 to your CPP for the year, but as an employee only half of this is deducted from your income while the other half is contributed by your employer. 


CPP: If you are self-employed

If you are self-employed, you will be responsible for paying the full $5,796 yourself. Self-employed taxpayers have 10.2% of their income between $3,500 and $58,700 deducted and contributed to CPP. 


Many of our self-employed clients will have a balance owing when they file their tax return, but often a good portion of the amount payable is actually just owed to CPP. While taxpayers are normally unimpressed that they have this balance owing at the time, it is important to realize that if a good part of this money is going to CPP you are simply “losing” this money to your own pension plan, rather than losing it to the government as tax. 


However, the fact that all of your CPP contributions as a self-employed taxpayer are directly deducted from your income (versus as an employee where your employer contributes half) is also a factor to consider when deciding to start your own business. That being said, a self-employed taxpayer can deduct half of their CPP payable as an expense to reduce net income. 


How to make CPP work for you

You can also receive CPP contributions back as part of your refund on a tax return if you over contributed through the year. As CPP is normally automatically deducted from employment income, this can happen in a few situations. 


The two most common situations are as follows:


  1. Taxpayers earning a low income for the year (since the first $3,500 of employment income is not eligible for CPP), and;


  1. Taxpayers with multiple T4’s (with each T4 the CPP contributions are normally based on that being the only T4). 


Between age 60-70 you can apply to begin receiving your CPP contributions back as a monthly benefit. The average monthly benefit ends up being around $600/month with the maximum usually near $1100/month. 


The amount you receive is based on your earnings and contributions through your working life, as well as the age you elect to start collecting CPP. Be sure to look out for our related article ‘When should you start collecting your CPP’ in which I will elaborate more on this topic. 


Having a disability on file with CRA will also increase the benefit you will receive, and potentially allow you to begin collecting CPP early as well. To get an idea of how much you have contributed and what type of benefit you might be looking at, you can check your statement of contributions on the CRA website


I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.


Until the next time,


Gerry J. Hogenhout, CPA, CGA, CFP, AMP

Founding Principle, Canadian Investment Services


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To find out more about CPP and how it relates to your personal situation, visit our website www.canadianinvestmentservice.com to book a free consultation today.