Many income earners in 2024 will pay a larger portion of their salary toward Canada Pension Plan (“CPP”) contributions.
Starting in 2024, the enhanced CPP now has two earnings ceilings. In the first tier employees contribute a portion of their earnings to CPP, up to a government-set threshold of $68,500 for 2024. This is the same structure as before simply with adjusted ceiling limits.
What is new is that for anyone earning more than that threshold amount, there is a second contribution level with a ceiling of $73,200. That means a maximum of $188 in additional payroll deductions. For 2024, employees earning over $73,200 will contribute $4,055.50 which is just over $300 more compared to 2023. For self-employed individuals that doubles to $8,111 as the maximum contribution.
Should I take dividends from my company instead?
At first glance, it would seem your cash flow would decrease by the $8,111 above. However, due to tax integration (salaries are slightly cheaper than dividends after accounting for corporate taxes) and the fact CPP is a deduction from income that actual true net cost is much less.
Example:
A physician taking a $15k per month salary from their corporation subject to the small business tax rate would only pay about $3,600 more to the CRA annually compared to the client taking dividends instead.
The benefits of paying into CPP
The revised CPP policies which have been increasing each year are designed to significantly boost retirement income for Canadians. Up until 2019, the benefits paid replaced one-quarter of average work earnings whereas now that has increased to one-third.
The full effects will be enjoyed decades from now when younger employees stand to gain the most. The maximum CPP pension will be more than 50% higher than current rates for those that are contributing under the new regime for 40 years. In 2024 the max CPP for an individual at age 65 is $16,375.
Your health status and life expectancy ultimately determine how much you will end up receiving from CPP as the longer you live, the more you earn back from all the years of contributions.
Creating RRSP room
You don’t have to wait until age 65 to see some immediate benefits from taking a salary and paying into CPP. By doing so you create annual Registered Retirement Saving Plan (“RRSP”) room. For 2024 the maximum annual RRSP room created is $31,560. Even if you are not ready to contribute to an RRSP yet, by taking a salary you create RRSP room which will carry forward and can be utilized when your cash flow allows or when you are in a higher tax bracket.
