Canada Pension Plan deductions going up as of tomorrow

Canada Pension Plan rates increase tomorrow. And each year after that for 2 more years.

Last month, Canada Revenue Agency announced that, starting in 2021, both the rates and pensionable earnings for CPP will increase.

Both the employee and employer contribution rates for 2021 will increase from 5.25% to 5.45%. For self-employed workers, the contribution rate will be the combined amount of both rates: 10.9%. (Yay, me!)

According to the announcement, the rate increase is due to the continued implementation of the CPP enhancement, which was introduced last year.

Prior to 2019, CPP replaced just 1/4 of a worker’s average work earnings, up to a maximum earnings limit each year. Any other retirement income had to come from other sources, such as Old Age Security, workplace pensions, or private savings.

Starting last year, however, CPP will continually cover increasingly more of a worker’s average work earnings received after 2019, until it reaches 1/3 of earnings. Workers contributing to CPP for 40 years after 2019 could see as much as 50% of their average work earnings for their retirement pension.

In addition to increasing the retirement income from 1/4 to 1/3 of a worker’s average earnings, the new CPP enhancements will increase amounts for post-retirement benefit, disability pension, and survivor’s pension, depending on how long the pensioner contributed to the plan.

All workers earning between $3,500 and an annual maximum pay in the pension plan. Workers making between the minimum and maximum amounts will pay the new rate of 5.45% starting tomorrow.

This new rate increase is part of a planned set of 5 annual increases, which started last year, when the rate increased from 4.95% to 5.10%. By 2023, the rate for employers and for employees will be 5.95% and 11.9% for self-employed workers. The rates had been 4.95% and 9.9%, respectively, since 2003.

The maximum limit for 2020 was $58,700, which will increase to $61,600 for 2021. The minimum limit (or basic exemption amount) hasn’t changed: it’s been $3,500 since 1996.

The maximum a worker will contribute to CPP in 2021 is $3,166.45 (5.45% of $61,600 minus the $3,500 basic exemption). Of course, it’s double for self-employed people.

The CRA plans to introduce a second maximum pensionable earnings limit in 2024, which will be higher than the first limit (7% higher in 2024 and 14% higher in subsequent years) but won’t replace it.

Workers making more than the first limit (which CRA estimates will be $69,700 by 2025) will pay 4% on any earnings between the two limits. Employers would also pay 4%, and self-employed workers would pay 8%.

These changes were first introduced through legislation in 2016 from Jean-Yves Duclos, who was then the minister of families, children and social development.

Originally published at kimsiever.ca on 31 December 2020.