CPP2 is a second additional contribution employers and employees make to an employee's pension plan. Such a measure took effect in 2024 for pensionable earnings between $68,500 and $73,200 at a rate of 4%, with a maximum contribution of $188 from each party (employer contributions must match employee contributions). The CPP contribution rate for self-employed individuals is 8% or $376.
What is the CPP (Canada Pension Plan) enhancement?
Starting January 1, 2019, many Canadian employers, employees, and self-employed individuals began paying additional contributions to their pension plans through enhanced CPP (CPP1). These enhancements are created to increase individual retirement income.
Anyone who has contributed to their CPP (Canada Pension Plan) enhancement since January 1, 2019, can expect to receive an increased retirement and post-retirement benefit, disability pension, and survivor's pension when they retire.
Introducing second additional CPP contributions
The second additional CPP contribution (CPP2) began on January 1, 2024, and was created to cover higher-earning employees. Employers and employees are required to make these contributions in addition to the base CPP and the first additional contribution (CPP1).
Employees whose yearly earnings exceed the first earnings ceiling will make CPP2 contributions on income up to a second, higher earnings ceiling.
What are the first and second earnings ceilings?
The first and second earnings ceilings establish a two-tier compensation structure. The first earnings ceiling, referred to as the Year's Maximum Pension Earnings (YMPE), is set at $68,500 for 2024.
The second earnings ceiling, YAMPE (the Year's Additional Maximum Pensionable Earnings), is approximately 7% higher than the first and will amount to $73,200 in 2024.
As of 2025 and beyond, the second earnings ceiling will be about 14% higher than the first.
How to calculate CPP2
When we know only those who earn above the first earnings ceiling are required to contribute to CPP2, the contribution rate is calculated as follows: CPP2 is a percentage of wages exceeding the first earnings threshold up to the amount of the second earnings threshold.
If the wage is between the first and second earnings ceiling:
- Employees contribute 4% of their earnings
- Self-employed contribute 8%
If the wage is higher than the first earnings ceiling but is below the second threshold:
- Employees will contribute 4% above the first earnings ceiling, and their employers will contribute the same amount.
- Self-employed individuals will contribute 8% of their net income above the first earnings ceiling.
Those who earn less than the first earnings threshold are not required to pay CPP2; they only make the base and first additional CPP contributions. For 2024, the percentages are as follows:
- 5.59% of both employees and employers
- 11.9% self-employed
The maximum pensionable earnings for 2024 are set at $68,500. With the basic exemption of $3,500, the maximum employee and employer CPP premium is $3,867.50 each. For self-employed people, that's $7735.00.
It is important to remember that the CPP contribution rate changes yearly. To ensure compliance with tax deduction requirements, Canadian business owners should check the T4032 payroll deductions tables available on the official site of the Canada Revenue Agency (CRA) or use payroll software such as the Payroll Deductions Online Calculator on the same website.
How to ensure compliance with payroll and tax requirements
In addition to calculating, withholding, and remitting base CPP, CPP1, and CPP2 contributions, employers should also do the following to ensure compliance with tax and payroll obligations:
Year-end updates to earnings ceiling rates for the upcoming tax year
Employers must apply updated earnings ceilings to calculate payroll deductions for the next tax year accurately. While the maximum earnings ceiling typically increases annually, CPP contribution rate percentages usually remain stable. The Canada Revenue Agency (CRA) releases the updated ceilings each November.
Business owners using specialized software, such as the Payroll Deductions Online Calculator, have these amounts automatically updated. However, regardless of the tools used, it is essential to double-check calculations to ensure accuracy.
Completing T4 slips
While employers are not required to report CPP and CPP2 contributions separately in employee pay stubs, they must do so when completing T4 slips.
The T4 slip requirements for 2024 (and beyond) include:
- Reporting employee base CPP and CPP1 contributions in Box 16
- Reporting employee CPP2 contributions in Box 16A
Changing perceptions of CPP contributions
New tax and payroll obligations may raise questions about their necessity and purpose, making it essential for employers to promote open communication and educate employees on the importance of CPP contributions. Unlike other deductions, such as income tax or GST/HST, CPP contributions should be seen as investments in a future personal savings account.
CPP is similar to the Registered Retirement Savings Plan (RRSP), serving as one of the ways to secure retirement income. Additionally, CPP offers additional support to individuals in times of need through the following programs:
- CPP disability pension: Provides income to individuals under 65 who cannot work because of severe or prolonged physical or mental disability. Eligibility requires a sufficient contribution to CPP.
- CPP children's benefit (disability): Offers monthly payments to dependent children (under 18 or up to 25 attending school full-time) of individuals receiving a disability pension.
- CPP death benefit: A one-time payment to assist funeral and related costs of a deceased CPP contributor.
- CPP survivor pension: Provides a monthly benefit to the spouse of a deceased CPP contributor.
- CPP children's benefit (survivor): A monthly payment to the dependent children of a deceased CPP contributor.
FAQ about CPP2
What is the purpose of CPP2 contributions?
CPP2 contributions were introduced to increase retirement benefits for higher-earning employees in addition to the base CPP and CPP1 contributions. These enhanced CPP contributions are designed to provide a more sustainable retirement income to those who earn between the first and second earnings ceiling.
When to start deducting CPP2?
As of January 1, 2024, employers must deduct CPP2 contributions from employees who earn above the first earnings ceiling. The CPP contributions are calculated as a percentage of employees' pensionable earnings that fall between the first and second earnings ceilings.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.