Why Contributing to the Canada Pension Plan (CPP) maybe Worth It – Part 1

In this short post, I want to take a closer look at the Canada Pension Plan (CPP) and why contributing to it may or may not be worth for Canadians. CPP is calculated based on your contributions during your working years and is mandatory for all employees in Canada. Contributions are deducted from each paycheck based on a legislated percentage of your income, up to annual maximums.

In this post, I’ll try to unravel what you actually get in return for your CPP contributions—starting with the benefits even while you're still working.

Benefits While Contributing

Interestingly, even during your working years, contributing to CPP provides some tax advantages. But first, let’s understand what CPP contributions consist of. This breakdown is based on 2024 tax year figures.

1. Basic Exemption

   You don’t pay CPP on the first $3,500 of your annual earnings. This is a small amount and most workers exceed it.

2. Base CPP Contributions

   CPP applies to income between $3,500 and $66,600 at a rate of:

   • 5.95% for employees (matched by employers)
   • 11.90% for self-employed individuals (they pay both shares)

   That works out to:

   • $3,867.50 for employees
   • $7,735.00 for self-employed individuals

3. CPP2 (Second Pension Layer)

   Introduced in 2024, CPP2 adds a top-up contribution on income between $66,600 and $73,200:

   • 4.00% for employees (matched by employers)
   • 8.00% for self-employed individuals

   That adds:

   • $188 for employees
   • $376 for self-employed individuals

So, for an income of $73,200, your total contribution is:

• $4,055.50 as an employee
• $8,211 as a self-employed individual

💸 Tax Credits While Contributing

Thankfully, CPP contributions come with tax credits:

• Base CPP contributions generate a tax credit at 15%.
• CPP2 contributions are deductible at your marginal tax rate.

Let’s assume your income is $73,200, and your marginal tax rate is 28.2%.

• Base CPP credit: $3,867 × 15% = $580

• CPP2 deduction: $264.00 × 28.2% = $53

Total tax benefit:

• $623 for employees
• $1,246 for self-employed individuals

Real cost of CPP assuming $73,200 as yearly income:

• $4,055 - $623 = $3,432 for employees
• $8,211 - $1,246 = $6,965 for self-employed individuals

In the part 2 of this discussion I will take this final numbers as a base and we will dive into what do you actually get in retirement for your working years CPP contributions and we approach answering the question if it was worth it.

Note: Even with the tax savings, self-employed workers are still paying significantly higher contributions out of pocket even after tax breaks above. This is one of the areas where being self-employed may have an option setting up a different compensation structure in order to skip contribution to pension fund entirely.