Individual Tax Series: Understanding CPP and EI Deductions: What Every Canadian Should Know

Rylan Kaliel
Jun 9
11 min read

Updated: Jun 20

Man sits in a wooden rocking chair on a porch, gazing at trees. Cozy interior setting with a calming, reflective mood.

Canada Pension Plan (CPP) and Employment Insurance (EI) are essential components of Canada's social safety net, providing benefits to workers during retirement, unemployment, disability, or maternity and parental leave. While these deductions reduce your immediate take-home pay, understanding their purpose, how they're calculated, and their future benefits can help you appreciate their value and manage your finances effectively.

What are CPP and EI?

Canada Pension Plan (CPP): CPP is a mandatory pension program providing income to eligible Canadians upon retirement, disability, or to surviving family members in the event of death. Your CPP contributions accumulate throughout your working years and translate into pension benefits upon retirement.

Employment Insurance (EI): EI provides temporary income assistance to Canadians who are unemployed through no fault of their own, unable to work due to illness or injury, or away from work due to maternity or parental leave. Regular EI benefits help cover basic expenses during these periods.

How are CPP Contributions Calculated?

CPP contributions are based on your annual pensionable earnings between a basic exemption and maximum annual pensionable earnings (limit) set by the government. Starting January 1, 2024, there is an additional CPP (CPP2), which has a revised annual pensionable earnings and rate applied to these amounts that are above the original CPP amount (CPP1). The rate of contribution is shared equally between employees and employers:

	CPP1	CPP2
Employee contribution rate	5.95%	4.00%
Employer contribution rate	5.95%	4.00%
Self-employed contribution rate	11.90%	8.00%
Maximum annual pensionable earnings	$71,300	$81,200
Basic exemption	$3,500	Starts at income above $71,300

* Rates are determined annually, it is advised that you review the CRA website for details of the rates for each year.

For employed persons, these amounts are deducted directly from your paycheque. For self-employed persons, you are generally required to pay these amounts as instalments to the CRA.

Detailed Discussion of CPP Contributions Calculations

As noted above, CPP contributions are based on your pensionable earnings. Pensionable earnings are generally defined as employment and/or self-employment income, with some adjustments made for specific amounts. For the purposes of this blog, we will consider all employment and self-employment income to be treated as pensionable earnings.

The amount of CPP paid is dependent on the amount of pensionable earnings received. A quick calculation of how much CPP is paid on yearly income would be as follows:

Table comparing "Employed" and "Self-Employed" CPP: earnings, exemption, rate, and payments. Key difference noted is the CPP rate for employed is 5.95%, for total CPP of $3,361.75 and for self-employed is 11.90% for total CPP paid of $6,723.50 on $60,000 of income. — Illustration of CPP paid under an employed versus self-employed scenario.

For both scenarios you’ll note that pensionable earnings remains the same at $60,000 with a basic exemption of $3,500, leaving $56,500 to be calculated for CPP. The key difference is that in the employed context, the rate is only 5.95%, which is due to the fact that the employer is required to pay 5.95% themselves. In the self-employed context, as there is no employer, the person is required to pay both sides of CPP, or 5.95% twice, for 11.90%. This greatly increases the amount of CPP required to be paid in a self-employed context.

As noted above, there are two levels of CPP, CPP1 and CPP2 (although CPP1 is broken into two groups, as discussed more in Deductions for CPP and EI below). Let’s look at an example of how CPP1 and CPP2 are calculated for an employed person with $80,000 of pensionable earnings.

A table comparing CPP1 and CPP2 pension details with income of $80,000, showing earnings, limits, rates, and total CPP of $4,382.10 highlighted at the bottom. CPP1 is calculated at a rate of 5.95% for $4,034.10 and CPP at a rate of 4.00% for $348.00. — Illustration of the calculation of CPP1 and CPP2 as an employee.

In the above example, we calculate CPP1 and CPP2 separately, determining whether the annual limit is greater or less than the actual pensionable earnings. For CPP1, the pensionable earnings are greater than the annual limit, so we use the annual limit. For CPP2, the pensionable earnings are less than the annual limit, so we use the annual limit.

Both CPP1 and CPP2 are reduced for the basic exemption or the limit for CPP1. The limit for CPP1 is more of a technical exemption, in that CPP2 is only calculated on pensionable earnings in excess of the CPP1 annual limit.

Once we determine the pensionable earnings applicable to CPP, we simply calculate this by taking this amount and multiplying it by the applicable rate. In this case, the employed person would pay a yearly total of $4,382.10 in CPP under this system.

For completeness, let’s review a similar situation for a self-employed person with the same income.

A table comparing CPP1 and CPP2 pension details with income of $80,000, showing earnings, limits, rates, and total CPP of $8,764.20 highlighted at the bottom. CPP1 is calculated at a rate of 11.90% for $8,068.20 and CPP at a rate of 8.00% for $696.00. — Illustration of the calculation of CPP1 and CPP2 as a self-employed person.

You’ll note that the calculations are very similar, with the only difference being the rates applicable. As was discussed above, a self-employed person has to pay both the employee and employer portion, so the rates are 11.90% for CPP1 and 8.00% for CPP2.

How are EI Premiums Calculated?

EI premiums are calculated based on your insurable earnings, up to a maximum yearly amount determined by the CRA:

Employee contribution rate	1.64%
Employer contribution rate	2.296%
Self-employed contribution rate	1.64%
Maximum annual insurable earnings	$65,700
Basic exemption	$0

* Rates are determined annually, it is advised that you review the CRA website for details of the rates for each year.

Like CPP, for employed persons, these amounts are deducted directly from your paycheque. For self-employed persons, you are generally required to pay these amounts as instalments to the CRA.

Note, for self-employed persons, you are allowed to opt in to paying EI, meaning by default you do not have to pay for EI. If you opt in to paying EI, you are only required to pay the employee contribution rate of 1.64% (at the time of writing), not both the employee and employer contribution rate which is required under CPP (for more details see Notes on Self-Employment for EI below).

Detailed Discussion of EI Contributions Calculations

As noted above, EI contributions are based on your insurable earnings. Insurable earnings are generally defined as employment and/or self-employment income, with some adjustments made for specific amounts. For the purposes of this blog, we will consider all employment and self-employment income to be treated as insurable earnings.

The amount of EI paid is dependent on the amount of insurable earnings received. A quick calculation of how much EI is paid on yearly income would be as follows:

Table comparing Employed and Self-Employed: Insurable earnings at 60,000, EI rate at 1.64%, and EI paid at 984. Basic exemption: 0. EI is the same under Employed and Self-Employed. — Illustration of EI paid under employed and self-employed scenarios.

For both scenarios you’ll note that insurable earnings remain the same at $60,000 with no basic exemption, unlike CPP. As noted above, in a self-employed context, assuming the person opts in, the rate would not change between the two, unlike CPP.

When we look at these calculations for the employee and employer, we would expect the following:

Spreadsheet showing employee and employer insurance details: earnings, exemptions, EI rate (1.64%, 2.296%), and EI paid ($984, $1,377.60). — Illustration of EI paid by both the employee and the employer.

As we can see above, the employee portion remains the same as the previous example, at 1.64%, whereas the employer portion increases by 1.4 to 2.296%. This results in the employer having to pay a higher rate on EI then the employee would.

Notes on Self-Employment for EI

As noted above, a self-employed individual would be required to opt in to EI in order to be required to pay these amounts and receive benefits under EI. The receipt of benefits under EI is explained further below, however, we will discuss how to opt in here.

In order to opt in to EI, the self-employed person is required to enter into an agreement through the My Services portal with the Canada Employment Insurance Commission (CEIC). Once completed, you will receive a letter from the CEIC and they are required to indicate they have entered into this agreement on Schedule 13 Employment Insurance Premiums on Self-Employment and Other Eligible Earnings of their T1 Income Tax and Benefit Return. You will be required to pay the premiums noted above once this begins.

There are a few requirements to be eligible to enter into this agreement, including:

Be a Canadian citizen or permanent resident.
Own your own business or control more than 40% of the corporation’s voting shares.
Have decreased the amount of time working on your business by more than 40% for at least one week.
Have earned a minimum of $8,826 in net self-employed earnings (insurable earnings) between January 1 and December 31.
Meet the conditions of the specific benefit you’re applying for.
Have entered into the agreement with the CEIC for at least 12 months.

Provided these conditions are met, you will generally be eligible for benefits under EI. See the Government of Canada website for more details.

Deductions for CPP and EI

Both CPP and EI provide some level of deduction on your tax return for the amounts paid. These deductions vary between whether the CPP was paid under CPP1 versus CPP2 (see Detailed Discussion of CPP Contributions Calculations above) or if they were EI. These deductions also vary between a deduction against net income for tax purposes or as a tax credit, see our Basics of Individual Taxation blog for a refresher. We will discuss each of these separately below.

CPP Deductions (Employed)

You can claim a deduction for the amount of CPP paid in the year as an employee as either a deduction and a tax credit. These are available as follows:

Type of deduction	Amount
Tax deduction	1.00% of CPP1 + 4.00% of CPP2
Tax credit	4.95% of CPP1

Let’s put this into action to see how this would work.

Spreadsheet showing CPP calculations with columns for CPP1 (Base), CPP1 (1.00%), CPP2, and Total. Details include earnings, limits, and deductions. CPP1 (Base) is charged at a rate of 4.95% for $3,356.10 and is included as a tax credit. CPP1 (1.00%) is charged at a rate of 1.00% for $678 and is included as a tax deduction. CPP2 is charged at a rate of 4.00% for $348 and is included as a tax deduction. Total tax credit of $3,356.10 and tax deduction of $1,026.00. — Illustration of the calculation of the tax credit and tax deduction from CPP for an employed person.

As we can, we broke CPP1 into two columns, the CPP1 (Base), which is at 4.95%, for our tax credit, and CPP1 (1.00%), which is for our tax deduction. Further, CPP2 goes entirely towards a tax deduction.

As is discussed in our Basics of Individual Taxation blog we would generally expect that the deduction would be the same or a more favourable deduction than a tax credit (depending on your applicable tax rate), which may result in us favouring the tax deduction. As such, a good portion of CPP1 and all of CPP2 are treated as the generally more favourable deduction.

CPP Deductions (Self-Employed)

For self-employed persons, the key difference is that you are required to pay the employer portion of CPP, which is equal to the total amount that is paid by the employee side (see Detailed Discussion of CPP Contributions Calculations above for more details). This effectively means you would be paying two times the CPP. The employer portion is treated entirely as a tax deduction. In terms of the employee side of the payments, these are treated the same as above in CPP Deductions (Employed).

Let’s put this into action to see how this would work.

Spreadsheet showing CPP calculations with columns for CPP1 (Base), CPP1 (1.00%), CPP2, Employer, and Total. Details include earnings, limits, and deductions. CPP1 (Base) is charged at a rate of 4.95% for $3,356.10 and is included as a tax credit. CPP1 (1.00%) is charged at a rate of 1.00% for $678 and is included as a tax deduction. CPP2 is charged at a rate of 4.00% for $348 and is included as a tax deduction. Employer is euqla ot the CPP1 (Base), CPP1 (1.00%), and CPP2 for $4,382.10 for a tax deduction. Total tax credit of $3,356.10 and tax deduction of $5,408.10. — Illustration of the calculation of the tax credit and tax deduction from CPP for a self-employed person.

We note that the calculations here are the same as CPP Deductions (Employed) above, however, the employer side is the sum of all of the CPP paid for CPP1 (Base), CPP1 (1.00%), and CPP2. This total amount is treated as a tax deduction for the self-employed person, increasing our tax deduction in the year by $4,382.10.

EI Deductions

EI deductions are treated differently, in that they are entirely a tax credit, no tax deduction. As was discussed above in Detailed Discussion of EI Contributions Calculations, you can choose to opt in to EI as a self-employed person, however, the amounts paid do not differ between being employed or as a self-employed person and neither does the tax credit.

Let’s put this into action to see how this would work.

As we can see, in both the Employed and Self-Employed (Opt-In) situation we get a tax credit equal to the EI paid. In the Self-Employed (No Opt-In) situation, as the EI rate is technically 0% no EI is paid and therefore there is no tax credit available.

Overpayments of CPP and EI

In some cases, you may overpay CPP and EI, perhaps through having multiple jobs in the year, being employed and self-employed, or through a variety of other scenarios. Similarly, you may underpay CPP and EI, perhaps through incorrect withholdings, through having multiple jobs where they believed you were under the basic exemption, or through other scenarios. Where CPP and EI are overpaid, when you file your return, you may be entitled to a refund or be required to pay a portion of these amounts.

In the preparation of the return, you will calculate what the required CPP and EI you should have paid for the year would be. This will then be compared to the actual amounts paid to the CRA and determined if an overpayment or underpayment arose.

Let’s put this into action to see how this would work.

Table showing financial data. Columns: CPP, EI, Total. Rows: Amounts withheld, Required amounts to be paid, Refund (Payable). CPP has a refund of $500 and EI has a payable of $200, for a net refund of $300. — Illustration of the tax refund (payable) for CPP and EI.

In the above example, we had an overpayment of CPP, which results in a refund of $500. On the EI side, we have an underpayment of EI, which results in a payable of $200. The net of these two is $300, which would be a refund.

It is important to note, we would also have to factor in our general income tax refund/payable to determine the full refund/payable in this situation. Where you owe an amount for CPP and EI but have a refund for income tax, or the other way around, the three balances will be combined to determine your full refund/payable for your tax return.

Consider the following to illustrate this.

Table showing financial data. Columns: CPP, EI, Income Tax, Total. Rows: Amounts withheld, Required amounts to be paid, Refund (Payable). CPP has a refund of $500, EI has a payable of $200, and Income Tax has a refund of $500, for a net refund of $800. — Illustration of the tax refund (payable) for CPP, EI, and Income Tax.

As seen above, there is a refund for income tax of $500, so the new total refund is now $800. When we review your tax refund/payable we should consider all three of these to determine how the refund is calculated, as in some cases we could get a significant refund from one which is offset by payable balance from the other balances.

Benefits Provided by CPP and EI

Understanding the benefits these deductions provide is crucial. While a detailed calculation of how much benefits can be expected and how much you have to contribute to get certain benefits it outside of the scope of blog, the below will give a general overview of the potential benefits.

CPP Benefits:

Retirement pension starting as early as age 60.
Disability pension if unable to work due to long-term illness or injury.
Survivor benefits to spouses, common-law partners, or dependent children upon your death.

EI Benefits:

Regular EI benefits for job loss or layoffs.
Special EI benefits for maternity, parental leave, sickness, or compassionate care leave.

To review the potential benefits that would be available to you, we would recommend reviewing the Government of Canada website to assist with these calculations, which we have provided below.

CPP – Canadian Retirement Income Calculator
EI – EI Benefits Estimator

CPP and EI Reporting and Documentation

Your CPP and EI contributions are reported annually on your T4 slip provided by your employer. Ensure accuracy by verifying that contributions match your records. Self-employed individuals report their contributions directly on their tax returns.

Common Misunderstandings and Pitfalls

Common errors regarding CPP and EI deductions include:

Misunderstanding the difference between CPP and EI contributions.
Not verifying annual contribution maximums, potentially leading to overpayments or missed claims.
Incorrectly assuming self-employed individuals don't need to contribute to CPP (they do, often at higher rates).
Misunderstanding the amounts owing for CPP and EI when reviewing your tax payable/refund on your tax return.

To avoid these mistakes:

Regularly review your T4 slips and payroll deductions for accuracy.
Stay informed about annual changes to contribution rates and maximums.
Review the tax refund/payable for each of CPP, EI, and income taxes to understand where your total refund/payable is coming from.
Consult a tax professional if uncertain about your obligations, especially if self-employed.

Strategic Considerations

To optimize your understanding and financial planning around CPP and EI:

Factor your expected CPP and potential EI benefits into your long-term financial planning.
Strategically plan retirement timing based on CPP eligibility and benefit amounts.
Understand EI eligibility requirements to fully utilize available support if needed.

Summary

Understanding CPP and EI deductions, how they're calculated, and the benefits they provide helps Canadians appreciate their importance and effectively plan for both short-term and long-term financial stability.

Stay tuned for our next blog, where we’ll explore deductions related to carrying charges and interest expenses.

KLV Accounting, a Calgary-based accounting firm, is here to help. Contact us today to enhance your financial strategy, minimize your taxes, and drive business success! For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.