CPP Tax Deductions

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The CPP provides Canadians with financial protection during retirement.
The CPP provides Canadians with financial protection during retirement. (Image: Ryan McVay/Photodisc/Getty Images)

The Canada Pension Plan, CPP, is a Canadian government-managed retirement plan that also provides financial protection from disability and death. All Canadian workers must contribute to this retirement plan. Payments are either deducted from wages by employers or paid directly by self-employed workers and business owners. Business owners must understand the rules that govern the Canada Pension Plan to calculate the tax deductions for their employees.

Contributions

Contributions toward the Canadian Pension Plan are shared by employers and employees. The portion paid by the employee is automatically deducted from his wage. The contribution amount varies depending on the employee's income and is split in half between the employer and the employee. If an individual is self-employed, she must pay for both portions of the CPP contribution. Once a worker reaches age 70 or starts receiving CPP payments, whichever happens first, she stops making CPP contributions.

Requirements

Employers must deduct the Canada Pension Plan payments of any employee over 18 and under 70, as long as he is not disabled and is not currently receiving CPP payments. Employers must match whatever CPP contribution their employee makes. CPP contributions as well as other employee and employer contributions to the Canada Revenue Agency must be held in a separate business account from the business's regular checking account.

Deduction Calculation

An employee's CPP deduction is calculated by deducting the current basic yearly exemption from the employee's gross pay, including benefits and allowances. The result is multiplied by the current CPP contribution rate. In 2010, the basic yearly exemption was $3,500 and the CPP contribution rate was 4.95 percent.

So, if the employee is paid monthly, her monthly CPP allowance is $291.67. If the employee has a gross pay, including taxable benefits, of $4,000 a month, her CPP is calculated by deducting $291.67 from $4,000 and multiplying the result by 4.95 percent; in this case, the amount is $183.56. The employer would deduct $183.56 from the worker's paycheck and send an additional $183.56 as his contribution.

Quebec Pension Plan

Residents of Quebec, or workers who who spend most of their work time there, use the Quebec Pension Plan instead of the Canada Pension Plan. However, both plans are similar and work together to ensure every worker gets coverage.

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