# Compliance Alert: Prepare Now for Long-Term CPP Contribution Rate Changes

If you do payroll, 2019 is a big year because it marks the start of a 5-year process that will see significant changes in CPP contributions. There are 3 major sets of changes, each of which poses different operational challenges. Here’s what you need to know about each set of changes to ensure you’re prepared.

**Higher Contribution Rates**

First, CPP contribution rates are increasing after having been frozen at 4.95% since the late 1990s, as illustrated in Table 1 below:

**Table 1: CPP Contribution Rate Increases (Applying to Both Employer & Employee Contributions)**

Year |
Yearly Increase |
New Rate |

2019 | 0.15% | 5.10% |

2020 | 0.15% | 5.25% |

2021 | 0.20% | 5.45% |

2022 | 0.25% | 5.70% |

2023 | 0.25% | 5.95% |

The government predicts the normal increase in the Year’s Maximum Pensionable Earnings (YMPE) over the 5-year increase period to be 14%. In other words, contribution rates *and* the earnings base on which those contributions are calculated are *both* increasing.

Required Software Changes: Rate increases won’t require any changes in the logic of current payroll software programs. |

**New Tier of CPP Contributions**

Effective 2024, an additional level or tier of contributions will be required from both employees and employers. __Explanation__: CPP contributions are currently based on the YMPE, less the $3,500 annual Basic Exemption. But starting in 2024, contributions will be required on earnings above the YMPE, up to a new maximum, termed the Year’s Additional Maximum Pensionable Earnings (YAMPE), which will be a percentage of that year’s YMPE. In 2024, the YAMPE will be 107% of the YMPE. Starting in 2025, the percentage will increase to 114%. Table 2 shows the expected YMPE and YAMPE values for those years:

**Table 2: Expected YMPE & YAMPE for 2024 to 2025**

Year |
YMPE |
Additional Percentage |
YAMPE |

2024 | $70,100 | 7% | $75,000 |

2025 | $72,500 | 14% | $85,700 |

Thus, in 2024, the total employee contributions required on pensionable earnings of $100,00 are projected to be:

- $70,100 – $3,500 at 5.95%, or $3,962.70

+ - $75,000 – $70,100 at 4%, or $196.00

for a total annual CPP contribution of $4,158.70. By contrast, the maximum CPP contributions for 2019 are $2,748.90. In other words, by 2024, CPP contributions on high income earners will increase by over 50%.

Required Software Changes: You’ll need to make coding changes to accommodate these additional CPP contributions, starting in 2024. |

**Contributions for Employees Owing QPP and then CPP in Same Year**

The other changes have to do with the historical differences between CPP and the equivalent Québec Pension Plan (QPP). __Example__: Pensionable earnings in Québec have for some time included employee benefits such as employer contributions to extended medical, dental and vision benefits that were only income taxable in Québec. But increases over the last several years have sent QPP contribution rates above CPP levels. Thus, in 2019, QPP contribution rates are 5.55%, versus 5.10% for CPP.

These differences cause problems in calculating CPP contributions for an employee that has earnings in Québec at the start of the year who then becomes subject to CPP contributions. Previously, the CPP formulas capped annual contributions at the YMPE, less the Basic Exemption, times that year’s contribution rate. This means there was a flat dollar amount on the annual CPP contributions owing. Once an employee hit those maximum contributions, CPP deductions stopped. For this purpose, QPP contributions weren’t treated any differently from CPP contributions.

In 2019, these maximum annual CPP contributions are $2,748.90 ($57,400, minus $3,500, at 5.10%). The equivalent QPP maximum contribution is $2,991.45 ($57,400, minus $3,500, at 5.55%). So, if an employee started 2019 contributing to the QPP but then became subject to CPP later in the year, he/she would hit the $2,748.90 CPP maximum contributions before his/her earnings hit $57,400 YMPE, since the QPP rate is higher than the CPP rate.

To address this issue, the CRA has changed the formula for CPP contributions to distinguish prior QPP contributions from prior CPP contributions. Previously, the cap on any pay period CPP contributions was calculated as a subtraction:

- The year’s maximum contributions ($2,748.90 in 2019)

– - Less any previous CPP or QPP contributions

Now the formula is:

- The year’s maximum contributions ($2,748.90 in 2019)

– - Less any previous QPP contributions, times the year’s CPP contribution rate over the year’s QPP contributions rate (previous QPP contributions X 5.10% / 5.55% in 2019)

– - Less any previous CPP contributions.

Although this new formula applies to the 2019 tax year, the CRA advises that it won’t enforce compliance with this change until the 2020 tax year to give employers a grace period to ensure their payroll systems are compliant.

__Note__: There’s no equivalent change in the QPP *formulas*. I’ve been in sessions where Révenu Québec representatives expressed their view that if an employee had reached the annual maximum CPP contributions and then transferred to Québec, the difference between the higher maximum QPP annual contributions and the lower CPP annual contributions would still be owing.

Required Software Changes: These new revisions will require software logic changes, starting in 2019. |

*Alan** McEwen** is a** Vancouver Island-based HRIS/Payroll** consultant** and** freelance** writer** with** over 25** years’** experience** in** all** aspects** of** payroll.** He** can** be** reached** at* *armcewen@shaw.ca** or** (250)** 228-5280. If you like these articles, please **sign up** to my email list to be notified of future postings.*