The Canada Pension Plan (CPP) began enhancement and modifications in 2019. The goal of the enhancements is to ensure that Canadians have access to higher benefits and greater financial stability through a small increase in the amount they contribute to the CPP.
This post aims to unpack the Canada Pension Plan (CPP) enhancements scheduled for 2024 and their implications for businesses, payroll, CRA compliance, and employee pension plans.
Québec employer or employee? Check out our post on the QPP Enhancement coming in 2024.
Table of Contents
Payroll Changes
Payroll Documentation
Understanding the Calculation
Quebec Pension Plan (QPP) Similarities
CRA Compliance
Impact on Employees
The Impact on Employees
Conclusion
Additional Resources
Frequently Asked Questions
Payroll Changes
Starting in 2024, the CPP enhancement will indeed introduce a new, higher earnings limit. This limit is known as the year’s additional maximum pensionable earnings (YAMPE).
However, the maximum pensionable earnings under the CPP for 2024 will be $68,500 (which is the Year’s Maximum Pensionable Earnings or YMPE), up from $66,600 in 2023.
This means that earnings up to $68,500 will be subject to standard CPP contributions.
Additionally, a higher, second earnings ceiling of $73,200 will be implemented in 2024, known as the Year’s Additional Maximum Pensionable Earnings (YAMPE).
Earnings between $68,500 and $73,200 will be subject to the second phase of CPP contributions, or CPP2 contributions, at a different rate.
Therefore, it’s important to include both the YMPE and the YAMPE in your discussion of the 2024 CPP enhancements to provide a complete picture of the changes affecting payroll.
What You Should Do:
- Don’t panic: You use PayEvo for your payroll, you have nothing to worry about. Our team of dedicated payroll experts is working hard to ensure that the 2024 CPP enhancements will not alter the way that you process payroll. Employees will see the CPP2 contributions as a new line on their T4s.
- Budget accordingly: Matching CPP contributions isn’t cheap, and it’s about to get more expensive. With employees able to access a higher limit and contribute more to CPP, be prepared to incur higher matching costs. Remember that employer amounts are tax-deductible, find out more about this process on our helpdesk.
Payroll Documentation
The enhanced CPP contributions, also known as CPP2, will not appear as a separate line in your payroll documentation in PayEvo, though your employees will see it as a separate line on their T4s.
What You Should Do:
- Communication: This is a great opportunity to let your employees know about the upcoming changes to CPP, you could even share this post with your team.
Understanding the Calculation
With the CPP enhancements for 2024, it’s important to understand how the changes impact contributions. Let’s simplify the calculation to see the real-world effects.
Before Enhancement
Previously, let’s assume the maximum pensionable earnings were $66,600. With a contribution rate of 5.95%, an employee’s contribution would be:
$66,600 × 0.0595 = $3,962.70 annually.
After Enhancement
For 2024, there are two tiers to consider due to the introduction of a second earnings ceiling:
- First Tier (Up to $68,500): Continue paying 5.95%.
- Second Tier (From $68,500 to $73,200): Pay 4% for CPP2 contributions.
Calculating CPP Contributions for 2024
The new annual contribution calculation is:
= ($68,500-3500) × (0.0595) + ($4,700 × 0.04)
= $3,867.50 + $188.00
= $4,055.50
Thus, under the enhanced CPP rules for 2024, the total annual contribution would be approximately $4,055.50.
Quebec Pension Plan (QPP) Similarities
The QPP is also experiencing similar rate changes. Employers and employees in Quebec should be aware that the same principles apply.
CRA Compliance
With the enhancement, you’re also responsible for remitting the higher CPP contributions to the Canada Revenue Agency (CRA). Essentially, you’ll be required to remit both the original and enhanced CPP contributions, each calculated based on their respective maximum pensionable earnings.
What You Should Do:
- CRA Reporting: Double-check that your remittance reports are being sent on payroll, follow our guide here.
- Auditing: It may be wise to conduct internal audits to ensure compliance with the CRA regulations. Certain plans can run a PIER report, to recalculate CPP, EI, QPP and QPIP to see if there are any deficiencies. See if you qualify here.
Impact on Employees
The CPP enhancements not only impact your payroll but also influence your employees’ retirement benefits. Essentially, the enhanced CPP will provide increased retirement, survivor, and disability pensions for all contributors.
The increment is a long-term adjustment and will fully materialize after about 40 years of making contributions, increasing the maximum retirement contribution amount by about 50%.
The Canada Pension Plan (CPP) enhancements indeed significantly impact employees’ retirement benefits. Starting from 2019, the CPP has been gradually enhanced to provide higher retirement, survivor, and disability pensions for contributors.
This enhancement is designed as a ‘top-up’ to the base CPP, adding two additional components: the first additional component, phased in between 2019 and 2023, and the second additional component, to be phased in between 2024 and 2025.
The enhancement aims to replace a greater portion of the average work earnings, growing from one quarter (25%) to one third (33.33%) of these earnings for contributions made after 2019. This change is significant as it directly impacts the amount of pension an employee will receive upon retirement.
One of the most notable impacts is the increase in the maximum CPP retirement pension, which is projected to be more than 50% for those who make enhanced contributions for 40 years. This means that the long-term benefit of the enhancements will become fully materialized over a period of approximately 40 years.
Starting in 2024, a second, higher earnings limit will be introduced. Employees and employers will each contribute an additional 4% on earnings above the first earnings ceiling (the Year’s Maximum Pensionable Earnings or YMPE) up to the amount of the second earnings ceiling (the Year’s Additional Maximum Pensionable Earnings or YAMPE).
This applies to earnings between the YMPE and YAMPE. For self-employed individuals, the contribution rate for this additional range will be 8%.
Employee benefits under enhanced CPP.
The Impact on Employees
Let’s illustrate this with an example. Consider Sarah, an employee with an annual salary of $80,000. The introduction of the CPP enhancements, particularly the second phase starting in 2024, affects her contributions.
2023 Scenario:
- Original Maximum Pensionable Earnings (YMPE): $66,600.
- Employee CPP Contribution Rate: 5.95%.
- Sarah’s CPP Contribution for 2023: $66,600 × 5.95% = $3,962.70 (since her earnings exceed the YMPE, she contributes on the full pensionable amount).
2024 Scenario:
- First Earnings Ceiling (YMPE): $68,500.
- Basic Exemption: $3,500.
- Second Earnings Ceiling (YAMPE): $73,200.
- Enhanced Earnings for Phase 2 (Difference between YMPE and YAMPE): $73,200 – $68,500 = $4,700.
- Phase 2 CPP Contribution Rate: 4%.
Sarah’s CPP Contribution for 2024:
- On First Earnings Ceiling (after exemption): ($68,500 – $3,500) × 5.95% = $3,867.50.
- On Enhanced Earnings for Phase 2: $4,700 × 4% = $188.00.
- Total CPP Contribution for 2024: $3,867.50 + $188.00 = $4,055.50.
Therefore, in 2023, Sarah’s CPP contribution would be $3,962.70, and in 2024, her total CPP contribution would increase to approximately $4,055.50 due to her qualifying for the second phase of the CPP enhancements.
Note: These calculations are based on the CPP enhancement details provided by the Canada Revenue Agency for the year 2024. For official figures, please see the tables on the CRA Enhancement Plan.
This revision reflects the correct pensionable earnings ceilings and contribution rates for 2024. The second phase of CPP enhancements includes a new higher earnings limit, known as the Year’s Additional Maximum Pensionable Earnings (YAMPE), which is introduced on top of the standard Year’s Maximum Pensionable Earnings (YMPE).
For more detailed information, you can refer to the Canada Revenue Agency’s announcement and the Canada.ca page on CPP enhancements.
What You Should Do:
- Communication: Keep your employees informed about how the CPP enhancements may impact their retirement benefits.
- Resources: Consider organizing workshops or seminars to help employees understand the complexities of CPP and its impact on their financial planning. Financial literacy leads to a happier, more productive team.
Conclusion
The CPP enhancement scheduled for 2024 brings several changes that employers need to be prepared for. Being proactive in updating your systems, informing your employees, and ensuring compliance with the CRA will go a long way in smooth sailing through these changes.
Additional Resources
- 📘 CPP Enhancement Overview
- 🍁 Employer’s Guide to QPP Enhancements 2024
- 🗃️ CRA Compliance
- 💲 12 Best Canadian Payroll Software in 2024
Frequently Asked Questions
What is the CPP enhancement for 2024?
The CPP enhancement for 2024 introduces a new, higher earnings limit, known as the year’s additional maximum pensionable earnings. This limit will be 7% higher than the original year’s maximum pensionable earnings.
Do employers have to update payroll software?
No! We’ll take care of the tricky technical aspects in the background, so you can relax, and keep submitting easy pay runs in the exact same way.
Will CPP2 show separately when submitting payroll?
The enhanced CPP contributions, known as CPP2, will not appear as a separate line in your payroll documentation on PayEvo, though it will appear as a separate line on T4s.
Any new CRA compliance responsibilities?
Yes, with the CPP enhancement, employers will have to remit both the original and enhanced CPP contributions to the Canada Revenue Agency (CRA). This comes as the same process but at a higher cost to employers.
How does CPP enhancement affect employee pensions?
The enhanced CPP will increase retirement, survivor, and disability pensions for employees in the long term. However, the full benefits will take about 40 years to materialize fully.
