26 What are CPP and EI contributions, and how do we calculate them?

CPP Contributions

Canada Pension Plan (CPP) is a taxable benefit given to individuals after they retire. To qualify for this benefit, you must be at least 60 years of age, and must have at least one valid contribution to the CPP. The amount a person receives will vary depending on how much one contributed to the CPP, their average earnings, and the age they decide to start receiving pension.

As of 2024, the employer and the employee are each expected to contribute 5.95% of the employee’s gross wages up to a maximum of $68,500 reduced by the basic exemption of $3,500.   This results in a maximum CPP contribution of $3,867.50 (($68,500 gross wages – $3,500 exemption) x 5.95%) each for the employer and the employee with a total CPP contribution of $7,735. The employee gets a personal tax credit of 15% on their portion of the contribution.

Introduction of the 2nd Earnings Ceiling

In 2024, a second earnings ceiling, officially called the Year’s Additional Maximum Pensionable Earnings (YAMPE), has been introduced as part of the CPP enhancement program. The YAMPE for 2024 is $73,200, and contributions on earnings between $68,500 and $73,200 will be subject to an additional 4% rate.

Here’s the calculation:

• YAMPE: $73,200.
• Additional Contribution Rate (on earnings between $68,500 and $73,200): 4%.
• Maximum Additional Contribution: $188 (for both employee and employer).

If a person is self-employed, they are required to pay both the employee and the employer’s portion of the CPP contribution. CPP is not withheld on the business income earned so the person is required to make the contribution by April 30th or, if required, as quarterly instalments. They would have to pay 5.95% x 2 x their net income, up to a maximum income of $65,000 ($68,500 – $3,500 exemption) for 2024.

Summary of Contributions for 2024

• Regular CPP Contributions: 5.95% on earnings up to $68,500, resulting in a maximum contribution of $3,867.50 for both employee and employer.
• Additional CPP Contributions: 4% on earnings between $68,500 and $73,200, resulting in a maximum contribution of $188 for both employee and employer.
• Total Maximum Contribution:
  • Employee: $4,055.50.
  • Employer: $4,055.50.
  • Combined: $8,111.

This ensures that higher-income earners contribute more toward CPP, enhancing their retirement benefits in the long term

Note, for purposes of our course we’ve simplified the CPP tax treatment slightly.  We treat the entire CPP contribution as eligible for the CPP tax credit.  In reality, for higher income earners, there is an ITA 60(e.1) Enhanced CPP Contribution for amounts above the YAMPE, which gets deducted from Net Income, this is calculated within all tax software, and I don’t require you to do the calculation in our course.   

EI Premiums

Employment insurance (EI) are benefits given to eligible individuals who have lost their job through no fault of their own and are able to and willing to work but cannot find a job.

Employees are required to participate in the EI program under most scenarios. 1.66% of the employee’s gross income is withheld, and the maximum insurable earnings as of 2024 are $63,200 resulting in a maximum EI contribution of $1,049 by the employee. The employer is required to contribute an additional 1.4 times the amount contributed by the employee for EI.

Self-employed individuals can opt-in to the EI program, but they are not required to do so. They do not have to pay the employers portion of the EI contribution for employees, unlike CPP, so the maximum EI contribution for self-employed individuals would be $1,049 for 2024.

Ex. What would be the CPP and EI contribution for an employee with gross wages of $42,000 for 2024? What would be the tax credits for CPP and EI?

October 2024