Employees and employers must pay into the Canada Pension Plan (CPP) and Employment Insurance (EI). Most earnings are taxable, pensionable and insurable. As there are too many to list, you can find this information on the CRA website.
Certain factors will make an employee exempt from Canada Pension Plan. Employees under 18 are exempt from paying CPP. However, once they turn 18, an employer must start deducting CPP the month after the employee turns 18. As with the employee contribution, the employer must also match the CPP contribution. On the other side, once an employee turns 70, and employer must stop deducting CPP the first month after the employee’s birthday. This means that the employer does not have to contribute as well. Once an employee applies for their CPP retirement pension, the employer must stop deducting CPP contributions the month before the employee receives their first payment. An employer may not be notified in time to stop the CPP deductions, therefore internal adjustments would have to be made.
Employment insurance has its own set of rules. ALL working employees, regardless of age must contribute to the employment insurance. As with CPP, there are certain earnings that are insurable and a list of these can also be found on the CRA website. The calculation for EI is different from CPP as well. The employer must contribute 1.4 times the amount that is deducted from the employees’ remuneration. Contributions to EI will be waived if one owns 40% or more of the company or if the employee is related to the employer. This would be considered “arm’s length”. In order to determine whether an employee falls under the “arm’s length” rule, I would always suggest a ruling from Canada Revenue Agency.
Once an employee reaches the maximum EI and CPP contributions for the calendar year, no more employee deductions and employer contributions are required. These maximums are set each year by the Canada Revenue Agency. A very important note to remember; If an employee changes employers at any time during the year, the CPP and EI deductions start all over again – regardless of how much the employee has already contributed. The employer is required to start the deductions all over again, even if that employee has already reached their maximum for the year with their previous employer. However, the employee would receive their over contribution at year end once they file their T1. Unfortunately for many employees, there is no way to waive that ruling, despite their past employment.
Finally, ensuring that employers have calculated CPP and EI deductions correctly, I would suggest processing a PIER report (Pension and Insurable earnings report) in September of each year. If there are any discrepancies, there would still be enough time to capture any underpayments before year end. Once a new year begins, any deductions for CPP and EI would apply to the new year, so it is very important to ensure that employers have looked after this in a timely manner.