What Is CPP?: A Guide To The Canada Pension Plan

Are you looking to understand more about the Canada Pension Plan or CPP? A strong understanding of the Canadian pension system is vital in every professional career, whether you’re an employee or an employer who needs to know how to run payroll in Canada. 

Learn what is CPP and what you are entitled to in this blog.

What is CPP?

So, what is CPP? 

The CPP is one of three parts of the Canadian government’s retirement income system. Established in 1965, this taxable, government benefit provides a basic benefits package to Canadian retirees and disabled contributors. This robust system is responsible for paying both retirement and disability benefits to its Canadians across the country. It is a key part of running payroll as an employer. 

Similarly to employment insurance, almost every Canadian citizen makes required CPP contributions once they turn 18 and can legally start working in Canada. The amount of contribution is dependent on a person’s salary. 

The CPP is a retirement benefit that you receive upon retiring that provides a lifetime income after the age of 65. The CPP makes up for part of your employment income, and once approved, the government dispenses your pension to you for the rest of your life. 

To receive this benefit, a person must meet specific thresholds to qualify, including:

• being at least 60 years of age,
• throughout your life, you have made at least one valid contribution to the CPP. 
  

Learn more about your eligibility for the Canada Pension Plan here.

Valid contributions constitute work executed in Canada, or a result of receiving benefits or “credits” from a former common-law partner, or spouse following the end of a relationship. The CPP requires mandatory pay-as-you-go contributions by all workers, including self-employed individuals. 

To access CPP benefits, you must be eligible under the qualifications mentioned above, actively apply for the benefits, and be approved by the Canadian government. 

Understanding the Canada Pension Plan

Most Canadians are eligible to contribute to and receive benefits from the Canada Pension Plan. The CPP is a deferred income retirement vehicle that works alongside Canada’s Old Age Security Plan, a primary pension plan for seniors.

The CPP reserves standard benefits for those who reach 65 years of age. If you are between 60-65, you can access specific provisions, including chronic disability and survivor benefits. Survivor benefits pertain to compensation after the loss of a spouse or partner before they have reached retirement age.

CPP and Taxes

Each province works alongside the CPP for taxation, except for Quebec, which has the Quebec Pension Plan (QPP). In other provinces, CPP taxes are based on wages. The benefit is shared between the employer and the employee with the goal of reducing the total combined taxable amount of employee wages. While wages are taxed starting at the age of 18 and end when you turn 65, this age rule doesn’t apply if the individual has already begun receiving CPP benefits or has died. 

The CPP takes the money from the taxed wages and places them into a “trust fund” that is managed by the CPP Investment Board. The board then invests those wages in many different avenues, such as bonds, stocks and other assets, helping to maximize the size of the CPP pool. 

How CPP is Calculated

Individual CPP amounts are calculated based on the number of years they contributed the required amounts. To receive the maximum allowance from the government, individuals must have contributed to the CPP for the required minimum of 40 years and have also contributed the necessary amount for each of those years. 

Depending on the amount the individual has contributed each year, The CPP dispenses a monthly amount that replaces around 25% of the contributor’s earnings. On top of it, it is all tied back to the Consumer Price Index. This is a complex system that considers several factors when calculating the amount of CPP that an individual will receive. 

Since it is a taxable benefit, many choose to share the income from the CPP between themselves and their spouses or common-law partners. When shared, this helps alleviate a fraction of the tax burden.

If you are self-employed, you have different things to consider, including whether or not you pay yourself a salary or take dividends. Depending on your choice, your CPP will be calculated differently. 

Applying for CPP

Applying to the CPP is easy. First, you must complete an online application. In some cases, you may have to fill out a paper application and either mail it in or bring it, along with the necessary supporting documents, to your nearest Service Canada Centre. 

The online application process has two steps:

1. Complete the application online, then submit it electronically.
2. Print out the signature page, sign it, and mail it to Service Canada.
   

If you want to receive the CPP, you must apply. Canada Pension Plan payments are not automatic. The Government of Canada suggests that you apply well in advance of when you want your pension to begin - meaning if you have plans to retire, you should consider applying sooner than later to avoid any income disruption.  

As mentioned above, one must qualify for the CPP based on several factors. Not all who apply will receive it, even if you meet the eligibility requirements until you formally apply for the benefits. If an application for the CPP is denied, you can appeal to the Canada Pension Appeals Board for a review of the application. 

Individuals applying must have a Social Insurance Number (SIN) and relevant banking information. For those looking to share their pension (and ultimately relieve themselves of a more substantial tax burden), you and your spouse or common-law partner must both have your SIN on hand. 

There you have it! A quick overview of the Canada Pension Plan and how to apply and access it.