Promote financial well-being for your employees with the help of Employment Insurance (EI) and The Canada Pension Plan (CPP).
Remember the days when your business was an idea, fed by your relentless dedication to grow an empire? Fast forward through the sleepless nights, weekend work marathons, and constant grind—your business is not just thriving; it’s soaring!
As the demand for your exceptional services grows, so does the need to expand your dream team. You’re faced with the delightful challenge of bringing in new talent—an expanding sales force, dynamic marketing associates, and heroes of HR to handle the hiring buzz. It’s a surefire sign that your business is on a trajectory of growth, and that’s something worth celebrating.
But beyond the excitement of adding new faces to your work family, there’s an element that often hides in plain sight: the financial intricacies of expansion. Many new business owners can find themselves caught off guard by the unforeseen costs tied to hiring. Employment Insurance (EI) and The Canada Pension Plan (CPP) are 2 of those aspects that deserve a moment in the spotlight, not just as regulatory obligations, but as strategic investments in your team’s well-being and the long-term stability of your business.
Delve into the depths of these business milestones as we unravel the layers of EI and CPP, explore their costs, and shed light on why understanding them is a clever move for your flourishing venture.
What’s Employment Insurance (EI) and who is eligible?
Employment Insurance (EI) is a program crafted by the Government of Canada for unemployed individuals who are looking for work, have paid their required premiums, and meet designated conditions. To qualify for EI benefits, individuals must demonstrate they were employed in insurable work, lost their jobs through no fault of their own, and are actively seeking employment. It’s also important to complete bi-weekly reports online or by telephone to maintain eligibility and receive entitled payments.
What’s the current EI rate?
Both employees and employers need to contribute a certain percentage of their earnings towards EI. The Canada Employment Insurance Commission (CEIC) raised the EI premium rate to $1.66 per $100 of insurable earnings for employees, with employers paying $2.32. This new rate represents a three-cent increase from the 2023 rates.
In 2024, the maximum amount of earnings considered for EI coverage is set at $63,200, which is an increase from $61,500 in 2023. This impacts the maximum annual EI contribution for both employees and employers.
For employees, the maximum annual contribution to EI will rise by $46.67, reaching a yearly total of $1,049.12. For employers, the increase is $65.34, making the maximum annual EI contribution per employee $1,468.77.
What is The Canada Pension Plan (CPP) and who is eligible?
The Canadian Pension Plan (CPP) is a mandatory pension plan that covers Canadian workers (excluding those covered by the Quebec Pension Plan). It offers income replacement for employees, known as contributors, and their families during retirement, death, or disability. Contributions are managed by the CPP Investment Board and made by contributors, employers, and self-employed individuals.
At the beginning of 2019, the CPP underwent a few significant changes. Upon full implementation, it has the potential to raise the maximum CPP retirement pension by up to 50% for younger workers! In fact, the second phase of these enhancements started in January 2024.
What’s the current CPP rate?
The Canada Revenue Agency (CRA) has bumped the CPP contribution room to $68,500 in pensionable earnings, up from $66,600 in the previous year. Contribution room refers to the amount of income an employee and their employer contribute to the CPP and is the maximum amount of pensionable earnings that either individual is required to make CPP contributions in a given year. For 2024, the basic exemption, or the portion of the pensionable earnings that is not subject to CPP contributions, remains the same at $3,500. Despite the gradual increase in contribution rates since 2019, the 5.95% rate for employers and employees will stay the same this year, with a maximum contribution of $3,867.50 each.
In the spirit of the new year, 2024 brings the second phase of the CPP enhancement: the debut of a second CPP contribution limit named CPP2. Within this new threshold, contributions will apply to earnings between $68,500 and $73,200. For the new CPP2 contributions, the rate is 4% with a maximum contribution of $188 for employers and employees, and 8% with a maximum of $376 for those who are self-employed.
How EI and CPP contributions work for self-employed individual
For entrepreneurs steering their own ships as sole proprietors or in dynamic partnerships, navigating the responsibilities and benefits of EI and CPP contributions is crucial! As the time comes to file T1 income tax and benefit returns, self-employed individuals are in charge of managing both the employer and employee portions of CPP contributions.
What sets these stipulations apart is the flexibility regarding EI premiums—an opt-in regulation tailored to their unique financial needs. When self-employed workers opt into the EI program to access EI special benefits, they can then enjoy the same premium rate as employees, without the obligation to cover the employer’s portion. This adds an extra layer of flexibility to their financial strategy and the potential for deductions on certain expenses such as advertising, business start-up costs, and property taxes.
Optimizing new EI and CPP rules for business growth
As the employment landscape evolves, successful businesses must stay ahead of the hiring game! This year, the newly established rules for EI and CPP contribution limits present opportunities for businesses to optimize their financial strategies. Let’s explore these changes and understand their benefits:
- The EI premium rates and maximum amount of earnings covered are also up in 2024, now sitting at $1.66 for employees, $2.32 for employers, and $63,200, respectively.
- The CPP’s new year’s maximum pensionable earnings (YMPE) for 2024 is $68,500—up from $66,600 in 2023—expanding the scope of standard CPP contributions.
- A higher, second earnings ceiling of $73,200, known as the year’s additional maximum pensionable earnings (YAMPE), has been introduced, affecting contributions between $68,500 and $73,200.
With this information in mind, let’s use a scenario where an employee makes an annual salary of $75,000 to break down the numbers and see the impact on both employee and employer contributions:
EI Contributions
- Before the EI changes took effect this year, the maximum amount of earnings covered was $61,500, with the premium rates set at $1.63 per $100 of insurable earnings for employees and $2.29 for employers.
- With a contribution rate of $1.63 per $100 of insurable earnings for employees and $2.29 for employers, the annual contribution would have been:
- Employees: ($61,500 ÷ 100) x 1.63 = $1,002.45
- Employers: ($61,500 ÷ 100) x 2.29 = $1,408.35
- With the new changes in 2024, an increase in contribution for both employees and employers must be taken into account.
- So, to calculate the new annual contribution for 2024, it would be:
- Employees: ($63,200 ÷ 100) x 1.66 = $1,049.12
- Employers: ($63,200 ÷ 100) x 2.32 = $1,466.24
Therefore, under the new EI contribution rules for 2024 and based on our $75,000 annual salary example, the total annual contribution for employees would be $1049.12 and for employers, it would be $1,466.24.
CPP Contributions
- Before the changes took effect this year, the maximum pensionable earnings were $66,600.
- With a contribution rate of 5.95%, an employee’s annual contribution would have been: ($66,600 – $3,500) × 0.0595 = $3,754.45.
- After the new changes this year, there are now 2 tiers to take into account due to the introduction of a second earnings ceiling:
- First Tier (Up to $68,500): Employees continue to pay 5.95%.
- Second Tier (From $68,500 to $73,200): Employees pay 4% for CPP2 contributions.
- So, to calculate the new annual contribution for 2024, it would be:
- = ($68,500 – 3500) × (0.0595) + ($4,700 × 0.04)
- = $3,867.50 + $188.00
- = $4,055.50
Therefore, under the enhanced CPP rules for 2024, the total annual contribution for both employers and employees would be approximately $4,055.50 each.
For businesses and self-employed individuals, these changes mean higher contributions, requiring careful financial planning to incorporate the increased expenses into their budgets. While the CPP introduces YMPE and YAMPE for contributions, EI remains a cornerstone for employee financial security. As a business owner, it’s important to communicate these changes to employees and understand how they impact payroll calculations to ensure compliance and effective budget management.
Understanding and strategically utilizing Employment Insurance (EI) and The Canada Pension Plan (CPP) are pivotal steps for a thriving business. With the CPP enhancements introducing new earning limits, employers need to adjust their financial strategies to accommodate increased contributions. Additionally, self-employed individuals must navigate managing both employer and employee portions of CPP contributions while leveraging EI as a flexible tool for financial stability. As businesses evolve, clear communication of these changes to employees and careful budget planning becomes essential for continued growth and compliance!
As your dedicated accounting and tax firm, we have the tools to help you properly craft a benefits package that aligns with your business goals and supports your employees’ financial wellness. Call us at 416-646-0550 or request a consultation.