What is CPP?

CPP stands for Canada Pension Plan. It is a social insurance program aimed at providing retirement benefits to contributors.

CPP in detail

Under the CPP, all Canadian residents who are employed, with ages 18 or above, have to make a contribution compulsorily. You need to continue making this contribution till the age of 70. Post the age of 70, you are exempted from CPP contribution, even if you have an income.

How much is the amount of CPP contribution?

CPP contribution is 9.9% of annual pensionable income. You have to make half (or 4.95%) of this contribution while the other half of 4.95% will be paid by your employer. An amount of $3,500 is exempted from CPP. So residents earning below this amount don't have to contribute towards CPP. And for those earning higher than $3500, this amount is deducted for calculating CPP contribution.

Example: If your income is $35,000, the first $3,500 will be deducted from this income, and your total CPP contribution will be $3118.5 (9.9% of $31,500). Your individual contribution will be around $1560 (4.95% of $31,500), and the remaining half will be due from the employer. In case you are self-employed, you will have to make the entire contribution of $3118.5. Irrespective of income, for 2014 the maximum contribution for CPP cannot exceed $4,851 in total or $2,425.50 each for the employer and employee.

CPP Benefits

Based on the contribution to CPP, you will start receiving retirement pension at the age of 65. You can also start getting pension from the age of 60 at reduced amounts. In March 2014, the average monthly amount received at age 65 is $611.85 per month and a maximum of $1,038.33. The amount is revised every year in January to keep up with living cost increases. The amount of CPP is calculated as 25% of average earnings during the contributory period. So the maximum amount is a result of a longer contributory period and higher earnings. For this reason alone, the maximum amount is received only in rare cases. It is possible to increase the benefits under the "child-rearing provision." Under this benefit, when you were not able to work, or there is a drop in your income for raising children under 7, you can exclude this time from the contribution period. This can help you maximize CPP benefits. Other benefits include disability benefits, survivor benefits after death to a spouse or common-law partner or children, etc.

Tax treatment

CPP contributions are eligible for federal tax credit. CPP income is taxable. However, you can share the income received via pension with a spouse or common-law partner, and reduce tax liability. The amount you can share is based on the period you have lived together during the contribution period.

Quebec Pension Plan (QPP)

CPP is applicable to all provinces, except Quebec, which has its own pension plan named QPP or Quebec Pension Plan. QPP is almost identical to CPP in terms of the exempt amount, contribution period, etc. However, QPP has a contribution rate of 10.35% of income, and the maximum contribution limit is $2,535.75.

How does CPP affect your tax?

CPP contributions are eligible for federal tax credits, and thus reduce the tax liability. Any CPP income received is taxable and increases the amount of tax payable. To understand the impact of CPP income on your tax liability, use the tax calculator.

Canadian Tax and Finance Guides