Canadian employers must withhold higher amounts from employees’ pay in 2022 to fund the mandatory defined benefit state pension plan for Canadian workers, called the Canada Pension Plan (CPP). (Quebec workers are subject to a similar plan, called the Quebec Pension Plan.)
Here’s a guide to what’s happening in the New Year.
A few years ago the federal and provincial governments across Canada agreed on a significant change to the CPP. An “enhanced” CPP regime was enacted in 2017, to be phased in over several years, with two elements:
- Premiums paid by employers and employees to the CPP would increase every year, over seven years, commencing 2019 (employers and employees each pay the same amount); and
- Eventually, the monthly benefit paid to retirees from the CPP would increase.
In 2021, the maximum employer and employee contribution to the CPP for the year was $3,166.45 each. In 2022, it will be $3,499.80 each. Employers should be aware of the reason why there is such a significant increase, to respond to questions that employees may raise.
The two components of the previously announced formula aren’t changing. First, the employer and employee contribution rates are set to rise from 5.45% of eligible pay to 5.7%, subject to a cap. Second, the cap itself is rising, as it’s tied to a government-determined wage amount, called the YMPE (yearly maximum pensionable earnings). The formula for determining the YMPE takes into account the growth in average weekly wages in Canada. Commentators have noted that the growth in average weekly earnings has been significant during the pandemic because there were fewer people working in lower-paying jobs.
Organizations including the Fraser Institute and the Canadian Federation of Independent Businesses have called for governments to hit the pause button on implementing the CPP “enhancements,” though lobbying efforts may not be successful. Employers may want to be proactive and communicate this change to employees by providing plainly worded explanations to describe that although there is a bigger amount taken from paycheques, this is a mandatory government program that aims to provide better retirement security to Canadian workers in the form of better-funded and higher pensions from the CPP.