Almost everyone over the age of 18 who works in Canada outside of Quebec and makes more than the minimum annual salary of $3,500 is required to contribute to the Canada Pension Plan (CPP), with very few exceptions. If you have a job, your employer will cover the remaining half of the required contributions after you pay your share. If you are self-employed, you make the whole contribution.
Regardless of how frequently or where you work in Canada, your contributions could make you or your family eligible for the following benefits:
Even if you are still employed, you stop contributing to the CPP at the age of 70.
Understanding the Canada Pension Plan (CPP) Enhancement for Self-Employed Individuals
The Canadian government introduced the CPP enhancement in 2019 to strengthen retirement income security for working Canadians. This enhancement gradually increased CPP contribution rates for employees, employers, and self-employed individuals. While employees and employers share the contribution burden equally, self-employed individuals are responsible for the full amount. This article explores the reasons behind this difference and its implications for self-employed Canadians.
Higher Contribution Rates for Enhanced Retirement Benefits
The CPP enhancement aims to provide Canadians with a more robust retirement income by increasing the maximum CPP retirement pension by approximately 50% once fully implemented. To achieve this, contribution rates have been gradually increasing since 2019. For self-employed individuals, the total increase in CPP contribution rates by 2023 is 2%, resulting in a higher contribution amount compared to employees and employers.
Self-Employed Individuals Contribute Both Employer and Employee Share
Unlike employees, who share the CPP contribution burden with their employers, self-employed individuals are responsible for paying both the employee and employer portions. This means their overall contribution rate is double that of employees, leading to a higher financial burden.
Additional Contribution Rate Increase in 2024
In 2024, a second earnings ceiling will be introduced, subjecting a portion of earnings above the first earnings ceiling to additional CPP contributions. This applies to both employees and employers, who will each contribute an additional 4% on earnings above the first ceiling, up to the second ceiling. For self-employed individuals, the additional contribution rate will be 8% of income earned between the first and second earnings ceilings.
Examples of CPP Contributions for Self-Employed Individuals
To illustrate the impact of the CPP enhancement on self-employed individuals, consider the following examples:
- Pierre (self-employed) – $75,000 income: In 2023, Pierre’s annual CPP contributions will be $7,509. In 2024, his total contributions will increase to $8,111 due to the additional CPP contributions.
- Ayesha (employee) – $150,000 income: Ayesha’s total CPP contributions in 2023 will be $3,754. In 2024, her contributions will increase to $4,056 due to the additional CPP contributions.
Tax Deductions and Credits for CPP Contributions
Self-employed individuals can claim a 15% non-refundable tax credit on 4.95% of their base CPP contributions and a tax deduction on the remaining 4.95% and the enhanced portion (2%). This provides some tax relief for the increased contributions.
The CPP enhancement aims to provide Canadians with a more secure retirement income. While self-employed individuals pay more in CPP contributions due to their dual role as both employee and employer, they also benefit from the increased retirement benefits. Understanding the reasons behind the higher contribution rates and the available tax deductions can help self-employed Canadians plan for their retirement effectively.
Additional Resources:
- Canada Revenue Agency (CRA): https://www.canada.ca/en/revenue-agency/news/2023/05/the-canada-pension-plan-enhancement–businesses-individuals-and-self-employed-what-it-means-for-you.html
- CRA: https://www.canada.ca/en/services/benefits/publicpensions/cpp/contributions.html
Keywords: Canada Pension Plan, CPP, CPP enhancement, self-employed, contributions, retirement income, Canada Revenue Agency, CRA, tax deductions, tax credits.
How do I know that all of my contributions are accounted for
Service Canada receives information about your earnings and contributions from the Canada Revenue Agency and Revenu Québec (for workers in Quebec). After that, Service Canada uses a Statement of Contributions to maintain records. You can verify the accuracy of this statement and get in touch with us if any of the numbers don’t add up.
When you are receiving a CPP Disability benefit, when you are unemployed, or when your income is less than the $3,500 minimum, you do not make any contributions.
Your post-retirement benefit will be impacted if you work and make contributions while receiving your CPP retirement pension.
Note: Quebec Pension Plan
The CPP operates throughout Canada, except in Quebec, where the Quebec Pension Plan (QPP) provides similar pensions and benefits.
CPP for Self-employed Business Owner – Answering Subscriber Question
FAQ
Do you pay CPP if self-employed?
Why did I get more CPP?
Does CPP increase if you keep working?
How do I maximize my CPP payments?
How much does a self-employed person pay a CPP contribution?
Self-employed individuals: Self-employed individuals must pay CPP contributions on their net self-employment income. The contribution rate is 5.95%, up to a maximum of $66,600. Payment deadlines: CPP contributions are due by the end of the month following the month in which the income was earned.
What is a self-employed CPP?
The CPP is a retirement pension plan that provides income to individuals who have contributed during their working years. When you are self-employed, you are responsible for both the employer and employee portions of the CPP contributions. The CPP contribution rate for self-employed individuals is based on your net self-employment earnings.
Do self-employed people qualify for CPP benefits?
In order to qualify for CPP benefits, self-employed individuals must make contributions to the plan. These contributions are based on a percentage of their net income, up to a maximum amount set by the Canada Revenue Agency (CRA) each year. By making these contributions, self-employed individuals are able to build up their CPP entitlement.
What is a self-employed Pension Plan (CPP)?
The CPP is a government-administered pension plan that provides a monthly retirement benefit to eligible contributors. As a self-employed individual, you are responsible for both the employee and employer contributions to the CPP. These contributions are calculated based on your net self-employment income.