What is cpp canada

All About The Canada Pension Plan (2023)

An important part of any Canadian’s pension planning is the benefits they may be entitled to receive from Government-sponsored pension plans. There are two main pension arrangements that you are automatically entitled to if you have worked and paid income taxes in Canada for a sufficient number of years.

Here we’ll take a look here at the two main plans, The Canada Pension Plan (CPP) and the Old Age Security (OAS) pension to show how they differ and explore how much you will contribute and can receive in retirement.

What is the Canada Pension Plan?

The Canada Pension Plan is a taxable pension benefit that you are automatically included in if you have held paid employment or self-employment in Canada and made at least one contribution to CPP Canada.

You may also qualify if you are the spouse or common-law partner of a member of the CPP in Canada, or if you become entitled at the end of a marriage or common-law relationship.

There is often confusion about how the two main Government pension plans work, so firstly let’s answer the question “what is CPP in Canada?”.

CPP is a pension you can draw at any time from age 60 to age 70. The amount you receive is based on several factors, which we will explain below.

It’s important to remember that, although you automatically have to contribute to CPP if you are employed or self-employed, and have earnings over $3,500, you don’t automatically receive the pension. You must apply for it. That said, CPP Canada will write to you just before your 65 th birthday to let you know your options.

There are also additional benefits that may be available to contributors to CPP, or their dependents:

• Post Retirement Benefit – If you continue to work after you start drawing CPP, you can continue contributing, which will give you additional CPP income.
• Disability Pension – If you suffer from a long-term physical or mental disability that prevents you from working you may qualify for a disability pension.
• Post Retirement Disability Benefit – a new benefit from January 2019 designed for people who didn’t qualify for Disability Pension because they had started drawing retirement benefits before age 65. Subject to eligibility criteria.
• Survivor’s Pension – a spouse or common-law partner of a CPP contributor can benefit from a pension. The amount depends on a number of factors.
• Children’s Benefit – if a CPP contributor qualifies for the Disability Pension or if they die, a dependent child under age 18, or under 25 if in full-time education, can qualify for a flat rate Children’s Benefit.
• Death Benefit – A fixed lump sum ($2,500 in 2022) payable to the deceased’s estate or eligible beneficiaries. Subject to sufficient contributions having been paid.

Canadians are lucky to have generous government pension schemes. Still, for many people retirement can mean a large reduction in lifestyle without additional retirement planning. It is never too early or too late to speak with a financial advisor.

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How does CPP work?

Every individual who is either employed or self-employed in Canada, with the exception of Quebec, pays a fixed percentage of their earnings into the CPP as long as they earn more than $3,500 per year. Quebec has its own arrangement, the Quebec Pension Plan (QPP), that pays similar benefits.

The benefits they receive at retirement are calculated based on the average of their earnings over their working life, their contributions to CPP and the age they choose to begin drawing benefits.

The pension can be drawn at any time between age 60 and age 70, although the standard retirement age is 65. If they’re drawn earlier than 65 the benefits will be reduced, and they will be increased if drawn later.

It isn’t necessary to stop working to draw retirement benefits, and you can continue contributing at the same time as receiving a pension, up to age 70.

The pension, once drawn, is protected against inflation and is payable until death. A surviving spouse or common-law partner may also continue to receive a pension as a proportion of the deceased’s pension.

If you have had periods of unemployment or time off work due to illness, or qualifying child-care, that time may qualify towards your CPP contributions.

How do I apply for CPP?

Once you’ve decided to draw the CPP you can complete the Canada Pension Plan application online through your My Service Canada Account or via a paper application, which can be posted or dropped into a Service Canada Office.

Online is quicker and you should normally receive confirmation within 7-14 days, whereas a paper application can take up to 120 days.

However, before applying for CPP you should check your entitlement and we would always recommend that you consult a financial advisor. They will help you decide whether it’s best to draw the CPP immediately or defer it.

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How much will I contribute to CPP?

If you are employed by someone else, you will contribute 5.7% of your “pensionable earnings” to CPP.

Your CPP contribution is based on your “pensionable earnings”. This is your employed earnings or self-employed income, after expenses, between a fixed lower amount of $3,500 per year and an upper ceiling, which is increased each year by the average increase in Canadian earnings. From January 1st, 2022 the upper earnings ceiling is $64,900.

For example, if you earn $50,000 in 2022 your CPP contribution will be $2,650.50.

Keep in mind

How to calculate CPP contributions:

1. $50,000 earnings — the $3,500 basic exemption = $46,500
2. $46,500 × 11.4% = $5,301
3. $5,301 ÷ 2 = $2,650.50

You can calculate your CPP contribution by applying the 11.4% rate to your earnings between the lower amount and the upper ceiling for each year.

If you are an employee, your employer pays half of this contribution, and you pay the remaining half. If you’re self-employed you pay the full 11.4% yourself.

A self-employed person also earning $50,000 like the example above would have a CPP contribution of $5,301 since they would not split the total with an employer.

From 2019 the total contribution was gradually increased from 9.9% to its full level now of 11.4%. The increase was to pay for enhancements to CPP.

A history of contribution rates can be seen below:

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What Is CPP?: A Guide To The Canada Pension Plan

Are you looking to understand more about the Canada Pension Plan or CPP? A strong understanding of the Canadian pension system is vital in every professional career, whether you’re an employee or an employer who needs to know how to run payroll in Canada.

Learn what is CPP and what you are entitled to in this blog.

What is CPP?

The CPP is one of three parts of the Canadian government’s retirement income system. Established in 1965, this taxable, government benefit provides a basic benefits package to Canadian retirees and disabled contributors. This robust system is responsible for paying both retirement and disability benefits to its Canadians across the country. It is a key part of running payroll as an employer.

Similarly to employment insurance, almost every Canadian citizen makes required CPP contributions once they turn 18 and can legally start working in Canada. The amount of contribution is dependent on a person’s salary.

The CPP is a retirement benefit that you receive upon retiring that provides a lifetime income after the age of 65. The CPP makes up for part of your employment income, and once approved, the government dispenses your pension to you for the rest of your life.

To receive this benefit, a person must meet specific thresholds to qualify, including:

• being at least 60 years of age,
• throughout your life, you have made at least one valid contribution to the CPP.

Learn more about your eligibility for the Canada Pension Plan here.

Valid contributions constitute work executed in Canada, or a result of receiving benefits or “credits” from a former common-law partner, or spouse following the end of a relationship. The CPP requires mandatory pay-as-you-go contributions by all workers, including self-employed individuals.

To access CPP benefits, you must be eligible under the qualifications mentioned above, actively apply for the benefits, and be approved by the Canadian government.

Understanding the Canada Pension Plan

Most Canadians are eligible to contribute to and receive benefits from the Canada Pension Plan. The CPP is a deferred income retirement vehicle that works alongside Canada’s Old Age Security Plan, a primary pension plan for seniors.

The CPP reserves standard benefits for those who reach 65 years of age. If you are between 60-65, you can access specific provisions, including chronic disability and survivor benefits. Survivor benefits pertain to compensation after the loss of a spouse or partner before they have reached retirement age.

CPP and Taxes

Each province works alongside the CPP for taxation, except for Quebec, which has the Quebec Pension Plan (QPP). In other provinces, CPP taxes are based on wages. The benefit is shared between the employer and the employee with the goal of reducing the total combined taxable amount of employee wages. While wages are taxed starting at the age of 18 and end when you turn 65, this age rule doesn’t apply if the individual has already begun receiving CPP benefits or has died.

The CPP takes the money from the taxed wages and places them into a “trust fund” that is managed by the CPP Investment Board. The board then invests those wages in many different avenues, such as bonds, stocks and other assets, helping to maximize the size of the CPP pool.

How CPP is Calculated

Individual CPP amounts are calculated based on the number of years they contributed the required amounts. To receive the maximum allowance from the government, individuals must have contributed to the CPP for the required minimum of 40 years and have also contributed the necessary amount for each of those years.

Depending on the amount the individual has contributed each year, The CPP dispenses a monthly amount that replaces around 25% of the contributor’s earnings. On top of it, it is all tied back to the Consumer Price Index. This is a complex system that considers several factors when calculating the amount of CPP that an individual will receive.

Since it is a taxable benefit, many choose to share the income from the CPP between themselves and their spouses or common-law partners. When shared, this helps alleviate a fraction of the tax burden.

If you are self-employed, you have different things to consider, including whether or not you pay yourself a salary or take dividends. Depending on your choice, your CPP will be calculated differently.

Applying for CPP

Applying to the CPP is easy. First, you must complete an online application. In some cases, you may have to fill out a paper application and either mail it in or bring it, along with the necessary supporting documents, to your nearest Service Canada Centre.

The online application process has two steps:

1. Complete the application online, then submit it electronically.
2. Print out the signature page, sign it, and mail it to Service Canada.

If you want to receive the CPP, you must apply. Canada Pension Plan payments are not automatic. The Government of Canada suggests that you apply well in advance of when you want your pension to begin — meaning if you have plans to retire, you should consider applying sooner than later to avoid any income disruption.

As mentioned above, one must qualify for the CPP based on several factors. Not all who apply will receive it, even if you meet the eligibility requirements until you formally apply for the benefits. If an application for the CPP is denied, you can appeal to the Canada Pension Appeals Board for a review of the application.

Individuals applying must have a Social Insurance Number (SIN) and relevant banking information. For those looking to share their pension (and ultimately relieve themselves of a more substantial tax burden), you and your spouse or common-law partner must both have your SIN on hand.

There you have it! A quick overview of the Canada Pension Plan and how to apply and access it.

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