There are a wide variety of social security schemes which help the most vulnerable members of our society. Employment Insurance (EI) helps those who have lost work through no fault of their own, and Old Age Security (OAS) is there for those who are over the age of 65. The Canada Pension Plan (CPP) is somewhere between a social security scheme and a normal pension; it is a mandatory program, but the amount you get out of it is proportional to the amount you put in. This means someone who has never contributed to the Canada Pension Plan will not receive a retirement pension from the Government of Canada when they retire. The way Canada determines the amount of your contributions is worth examining; here’s how pensionable salary works.
The golden rules about pensionable salary are threefold; first, your salary must have been made in Canada (though money made being sent by a Canadian company overseas to work may also be pensionable. Second, the salary must have been made after the age of 18 and before the age of 70 (though you can opt out of contributing at age 65). The final golden rule is the salary must have been made after January 1st, 1966, when CPP was created.
Salary that is considered pensionable falls between two categories, the Year’s Basic Exemption (YBE) and the Year’s Maximum Pensionable Earnings (YMPE), both of which can change in any given year. As of the writing of this article, the YBE was $3500, and the YMPE was $55900. The first $3500 you earn are not considered pensionable earnings, and any amount made in excess of $55900 are also not pensionable.
What exactly, then, is “pensionable”? The answer is relatively straightforward; the Canada Revenue Agency (CRA) will take a total of 9.9% of your pensionable earnings and put them into the CPP. This 9.9% is divided between the employee and the employer, so most of us will only see 4.95% be taken off the salary we earn that falls between the YBE and the YMPE, with the employer paying the other 4.95%. Self-employed individuals, however, must pay the entire 9.9% themselves.
These rules form the basis of what is considered pensionable salary, but there are a great many other details worth considering. CPP can, for example, be used when long-term disability strikes; the Disability Basic Exemption (DBE) is different than the YBE, and pensionable amounts below the DBE can affect your eligibility for disability benefits. There are also a variety of provisions one can use to get more out of their pension plan; for example, if having children reduced your earnings, CPP will consider this during their calculation of your retirement pension.
The Canada Pension Plan is a multifaceted creature, and the best way of tackling your pension questions is to consult with your accountant. For an efficient Winnipeg accountant who is more than happy to answer your questions about pensions, get in contact with Compass CPA.