What Is the Canada Pension Plan (CPP) Tax?
Gain clarity on Canada Pension Plan (CPP) contributions. Understand their fundamental purpose, calculation, and impact on your future benefits.
The Canada Pension Plan (CPP) is a social insurance program providing financial security to Canadians, offering income replacement for retirement, disability, and death. The “CPP tax” refers to mandatory contributions by most working individuals and their employers across Canada, excluding Quebec, which has its own Quebec Pension Plan (QPP). These contributions fund the CPP system.
Who Contributes to CPP
Nearly every person over 18 working in Canada, outside of Quebec, who earns more than a minimum annual amount, must contribute to the Canada Pension Plan. This includes employees, employers, and self-employed individuals.
For employees, contributions are automatically deducted from their paychecks. Both the employee and their employer contribute an equal share. Employers are responsible for remitting these deductions to the Canada Revenue Agency (CRA) along with their matching portion.
Self-employed individuals bear the full responsibility for both the employee and employer portions of CPP contributions. These contributions are typically calculated and paid when filing their annual income tax and benefit return. Their requirement to cover both shares reflects their dual role as both worker and business owner.
How CPP Contributions Are Calculated
Calculating CPP contributions involves the basic exemption amount, the year’s maximum pensionable earnings (YMPE), the year’s additional maximum pensionable earnings (YAMPE), and applicable contribution rates. The basic exemption amount, which is $3,500 for 2025, represents the portion of earnings on which no CPP contributions are required.
For 2025, the Year’s Maximum Pensionable Earnings (YMPE) is set at $71,300. Earnings above the basic exemption amount up to the YMPE are subject to the primary CPP contribution rate. The employee and employer contribution rate for this portion remains at 5.95% each, resulting in a combined rate of 11.9% for self-employed individuals.
Beginning in 2024, a second earnings ceiling, the Year’s Additional Maximum Pensionable Earnings (YAMPE), was introduced as part of the CPP enhancement. For 2025, the YAMPE is $81,200. Earnings between the YMPE ($71,300) and the YAMPE ($81,200) are subject to an additional contribution rate.
The second additional CPP contribution rate (CPP2) is 4.00% for both employees and employers, and 8.00% for self-employed individuals, applied to earnings within this new range. This enhancement aims to increase future retirement benefits by protecting a higher portion of earnings. For example, an employee earning $75,000 in 2025 would contribute 5.95% on ($71,300 – $3,500) and 4.00% on ($75,000 – $71,300).
For an employee earning $75,000 in 2025:
Pensionable earnings for the first component: $71,300 (YMPE) – $3,500 (basic exemption) = $67,800.
Employee contribution for the first component: $67,800 5.95% = $4,034.10.
Pensionable earnings for the second component: $75,000 – $71,300 (YMPE) = $3,700.
Employee contribution for the second component (CPP2): $3,700 4.00% = $148.00.
Total employee CPP contribution: $4,034.10 + $148.00 = $4,182.10. The employer would contribute an equal amount.
For a self-employed individual earning $85,000 in 2025:
Pensionable earnings for the first component: $71,300 (YMPE) – $3,500 (basic exemption) = $67,800.
Self-employed contribution for the first component: $67,800 11.90% = $8,068.20.
Pensionable earnings for the second component: $81,200 (YAMPE) – $71,300 (YMPE) = $9,900.
Self-employed contribution for the second component (CPP2): $9,900 8.00% = $792.00.
Total self-employed CPP contribution: $8,068.20 + $792.00 = $8,860.20.
CPP Contributions and Your Benefits
Contributions to the Canada Pension Plan build a contribution record that impacts an individual’s future eligibility and the amount of CPP benefits. These contributions fund retirement pensions, disability benefits, and survivor benefits.
The more an individual contributes over their working life, and the higher their earnings, the greater their potential future benefits. The CPP system links contributions to benefit entitlements, meaning a robust contribution history translates into increased financial security during retirement or in the event of disability or death. For instance, the CPP enhancement aims to gradually increase the income replacement rate from 25% to 33.33% of average work earnings for those who contribute to the enhanced plan over 40 years.