Heads up: important CPP & QPP legislation changes effective January 2024

Have you heard the news? A second contribution and earnings ceiling for Canadian Pension Plan (CPP) enhancement and Québec Pension Plan (QPP) will open for Canadian businesses and their employees as of January 1, 2024 (that’s not very far away!).

“Second additional CPP and QPP contributions begin in 2024,” reads the Government of Canada’s website. “After January 1, 2024, any employee who contributes to the CPP or QPP will make CPP2 or QPP2 contributions if and when their annual income surpasses the first earnings ceiling, the Year’s Maximum Pensionable Earnings (YMPE). Employers will make a matching CPP2 or QPP2 contribution.”

Let’s back up for a second… what’s CPP & QPP enhancement?

CPP and QPP contributions first came into effect in 1966 and are mandatory contributions from all eligible employees, employers, and self-employed persons in Canada. Individuals residing in the Province of Québec contribute to QPP, while individuals in all other territories and provinces contribute to CPP.

There are some exceptions to the parameters of QPP and CPP contribution eligibility, but it begins at the age of 18. For those contributing to CPP, it continues until you start receiving the retirement pension or turn 70 (whichever comes first). For those contributing to QPP, it continues until you start receiving the retirement pension or until January 1 of the year you turn 73 (whichever comes first). After paying into CPP or QPP over the course of their career, all contributors begin receiving a basic and ongoing level of earnings upon age-eligibility, retirement or disability.

Essentially, CPP and QPP enhancement initiatives are intended to increase the respective CPP and QPP retirement pensions. The second contribution rate and earnings ceilings is a part of the enhancement initiatives, and will affect the way Canadian businesses process their payroll for employees whose income is within the designated threshold.

What’s this “second earnings ceiling” and to whom does it apply?  

How much is deducted and remitted for employee (and subsequently employer) CPP and QPP contributions is based on an employee’s annual earnings. In the past, the government has set a maximum CPP and QPP contribution (or earnings ceiling) for the year ahead, referred to as the Year’s Maximum Pensionable Earnings (YMPE). Typically, the YMPE is announced in November of each year (to take effect the following January) and is based off the average wage in Canada.

However, in 2024 there will be two earnings ceilings as opposed to just one: the YMPE and the new Year’s Additional Maximum Pensionable Earnings (YAMPE). The new YAMPE will apply to employees who have an income above the first earnings ceiling, and therefore “will contribute an additional percentage of income they earn above the first earnings ceiling up to the second earnings ceiling.” The second CPP contribution refers to that additional contribution.

CPP details

The chart above outlines the CPP rates that apply until the employees’ earnings rise above the first earnings ceiling. Income earned between the first and second earnings ceiling qualifies for the second CPP contribution, which is 4% on the dollars between the first and second ceiling for both employers and employees. Self-employed persons should note that they pay both the employee and employer CPP contributions. For more information on CPP contributions for self-employed persons, visit: https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2023/maximum-pensionable-earnings-contributions-2024.html.

“In 2024, the second earnings ceiling will be set at an amount that is 7% higher than the first earnings ceiling,” reads the Government of Canada’s website. “In 2025, the second earnings ceiling will be set at an amount that is 14% higher than the first earnings ceiling. From 2026 on, the first and second earnings ceiling will increase incrementally each year, but the contribution rates will remain the same indefinitely.”

Going forward, those who earn less than the first earnings ceiling will not see further contribution rate increases. However, those processing a business’ payroll should be aware that the first and second earnings ceilings could continue to increase from year to year. That information is typically announced by the Government every November, and can also be found in Payworks’ Payroll Guide for Canadian Business shortly thereafter.

QPP details

The chart above outlines the QPP rates that apply until the employees’ earnings rise above the first earnings ceiling. Income earned between the first and second earnings ceiling qualifies for the second QPP contribution, which is 4% on the dollars between the first and second ceiling for both employers and employees.

“The amount of the additional maximum pensionable earnings will be equal to 107% of the maximum pensionable earnings for 2024 and 114% of the maximum pensionable earnings for 2025 and subsequent years,” reads Revenu Québec’s website.

Those processing a business’ payroll should be aware that the first and second earnings ceilings could continue to increase from year to year. That information is typically announced by the Government every November, and can also be found in Payworks’ Payroll Guide for Canadian Business shortly thereafter.

Are there exceptions?

Great question! The answer is: yes.

CPP and QPP contributions are prorated for the calendar year when an individual either becomes or ceases to be eligible to contribute to the retirement plan, which creates unique situations where employers would either start or stop deducting CPP or QPP for a specific employee. According to the Government of Canada and Revenu Québec, in those circumstances employers have to prorate the maximum CPP or QPP contribution to ensure the correct amount has been deducted. Regarding the second CPP or QPP contribution, this can mean employees (and subsequently employers) may have to pay that second CPP or QPP contribution sooner than the second earnings ceiling.

For additional information on exceptions for CPP, visit: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/starting-stopping-cpp-deductions.html.

For additional information on exceptions for QPP, visit: https://www.revenuquebec.ca/en/businesses/source-deductions-and-employer-contributions/calculating-source-deductions-and-employer-contributions/quebec-pension-plan-contributions/.

What Canadian employers need to know for processing payroll

It’s the employer’s responsibility to deduct and remit all CPP and QPP contributions – which will additionally include the second CPP and QPP contribution starting as of January 1, 2024.

Come year-end processing (in February 2025 for the 2024 tax year), there will be additional requirements on employees’ tax forms:

• The base and first enhanced CPP or QPP contributions are to be reported in Box 16.
• The second CPP contributions are to be reported in Box 16A.
• The second QPP contributions are to be reported in Box 17A.

For more information on deductions, remittances, and reporting requirements for self-employed persons, visit: 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?utm_campaign=not-applicable&utm_medium=vanity-url&utm_source=canada-ca_cpp-enhancement.

Payworks pro tip: once an employee starts to contribute to the second earnings ceiling, you’ll see additional lines on your Payroll Reports that show CPP2/QPP2 Employee and CPP2/QPP2 Employer within the Payworks application. You’ll also see these values appear in other places throughout the system, like on the Stat Deduction Pay Element descriptions.

Ensuring employees are paid accurately is a top priority for Canadian businesses, and we can help make it the least of their concerns. To learn more about our modern Payroll solution – that not only calculates and remits CPP and QPP contributions to the Canada Revenue Agency (CRA) and Revenu Québec on our clients’ behalf, but also processes employee tax forms – visit: https://www.payworks.ca/solutions/payroll.