CPP:  Second Tier Rate Hike 6 Months Away

Evelyn Jacks

Both the CPP and EI contributions – which are mandatory – rose in 2023,  reducing the take-home pay for employees.  But cash flow erosion from these payroll taxes is only increasing:   the second tier rate hike on CPP contributions is only 6 months away.  That’s going to affect small business owners and higher earners, as well, who will each pay 4% more above the first earnings ceiling (YMPE) and up to the amount of a second earnings ceiling (YAMPE).  Here’s what you need to know, as you council clients to clear up debt and accelerate RRSP/TFSA/FHSA savings in anticipation of these changes:

A second earnings ceiling that will initiate higher CPP premiums will be introduced on January 1, 2024 and will be known as the Year’s Additional Maximum Pensionable Earnings. This will not replace the first earnings ceiling, which is indexed to the growth in average weekly wages and salaries. In fact, employees will pay both. The value of the second earnings ceiling is based on the value of the first earnings ceiling and set at an amount that is 7% higher than the first earnings ceiling. 

 Then it will rise to 14% above the first earnings ceiling in 2025. From 2026 forward, both ceiling levels will increase incrementally, but contribution rates will stay the same.    

Essentially this will affect people who make between $67,000 and $80,000.  The government has provided some examples.  For someone who is self-employed earning $75,000, CPP contributions are anticipated to increase as follows, assuming a first estimated ceiling level of $66,600:

For someone earning $150,000, the numbers appear below; note by 2025 it is estimated you’ll pay $8,654 in CPP premiums annually. 

Urgent is how micro businesses will cope with these changes, given their need to also repay CEBA loans by December of 2023. 

Remember, those who are unincorporated self-employed must pay both the employer’s and employee’s portion of the CPP..  

Bottom Line:  Canadian business and workers toned to brace now for even higher CPP premiums in the future.  Savings room for other critical retirement accounts – such as the TFSA, FHSA and RRSP – will diminish even more.  That’s why it's critical to fill those savings room opportunities in 2023.

Aside from budgeting for savings opportunities, it’s very important for the self-employed to start putting some money away now to pay their taxes in the spring of 2024,  and to get ready for their 2024 CPP remittance, which is due when you file those tax returns in the spring of 2025.

Speak to your tax and financial advisors about this.