Whether you are just starting to receive CPP payments or are thinking ahead to the future, you will likely be wondering: Is CPP taxable?
CPP (Canada Pension Plan) payments are taxable income and must be included in your income when you file your tax return. The amount of CPP you received during the year is shown on your T4A (Pension, Retirement, Annuity, and Other Income) slip.
I will cover below whether CPP payments are taxable.
What is the Canada Pension Plan (CPP)?
The Canada Pension Plan (CPP) is a government-funded pension plan that provides retirement, survivor, and disability benefits to eligible contributors.
The plan is funded by contributions from employees, employers, and self-employed individuals, and it is administered by Employment and Social Development Canada (ESDC).
To be eligible for CPP benefits, individuals must have contributed to the plan through payroll deductions or self-employment contributions for a certain period of time, known as the “contributory period.”
The contributory period begins at age 18 and ends when the individual reaches age 65 or begins receiving CPP retirement benefits, whichever comes first.
How much you receive from the CPP will be a result of how much money you have contributed and for how long. The CPP pension can typically be started between the ages of 60 and 70 – the earlier you begin taking CPP payments, the lower the CPP payment amount will be.
If you feel that you have an above-average life expectancy, it may make sense to choose to start your CPP payments at a later age (closer to 70). If you instead believe that you may have a below-average life expectancy, it may make sense to start CPP payments at an earlier age (closer to 60).
How Much CPP Payments Will You Receive?
CPP retirement payments are usually fairly modest and will likely not be enough to support your retirement on your own fully.
If you are living in urban centers like Vancouver or Toronto, where the cost of living is higher than most other places in Canada, CPP payments may feel very insignificant. Even if you are living in parts of Canada where the costs of living are lower, CPP payments will likely not be enough to cover retirement.
As an example, if you were starting CPP payments in 2022 at an age of 70, the absolute maximum you could qualify for would be $1,253.59 per month (or $15,043.08 per year).
It is important to have at least one or more additional income sources in retirement in order to be able to fund your lifestyle.
Related Reading: CPP Payment Dates in Canada
How is Income Taxed in Canada?
In Canada, the federal government imposes an income tax on individual taxpayers, while Canadian provinces and territories also have the ability to also charge their own taxes.
The income tax system is progressive, meaning that individuals with higher incomes are taxed at a higher rate.
Taxable income is determined by subtracting deductions and credits from gross income. The Canada Revenue Agency (CRA) is responsible for administering and enforcing federal tax laws. Tax returns must be filed annually by April 30th or June 15th if you are self-employed.
Income from investments (excluding dividend income) is typically taxed in the same way in Canada – at your marginal tax rate (or MRT).
Federal Income Tax Brackets
Regardless of what province you live in, you will be responsible for paying federal income tax. The federal income tax brackets break down into:
|2021 Federal income tax brackets||2021 Federal income tax rates|
|$49,020 or less||15%|
|$49,020 to $98,040||20.5%|
|$98,040 to $151,978||26%|
|$151,978 to $216,511||29%|
|Income over $216,511||33%|
In addition to being responsible for federal income tax, you will also have to pay provincial income tax. Your total tax rate is the sum of both the provincial and federal tax rates at your specific income levels. Here is an updated list of the provincial tax rates from the CRA.
What Rate are CPP Payments Taxed At?
CPP payments are considered income by the CRA. In almost all cases, CPP payments will be added to your income for the year.
This means that CPP payments will be taxed, along with any other income for the year, at your specific marginal tax rate.
Considering Other Retirement Income Sources
Since CPP payments during retirement are modest, you will likely have to supplement your retirement income from multiple sources.
One of the main sources of income throughout your retirement should be from private savings. This can include a variety of income-generating assets including:
- Real estate
- Income-generating investments
- Employer pension plans
Having a lump sum of money that you are drawing income from on a regular basis is also an option to consider.
Another income source during retirement is Old Age Security, or OAS.
Related Reading: Retirement Income Sources in Canada
Frequently Asked Questions
Is OAS Taxable?
It is important to understand that OAS is separate from CPP payments.
Old Age Security (OAS) is a monthly pension that the Canadian government offers to people that qualify and that are 65 years of age or older. It is a program that does not require contributions over the course of a Canadian’s life – you do not need to pay anything to be eligible for benefits.
Qualifying for OAS requires that you are a Canadian citizen or resident and have lived in Canada for at least 10 years once you have reached the age of 18.
The OAS is a non-contributory program, meaning that individuals do not have to pay into the program to be eligible for benefits. To qualify for the OAS, an individual must be a Canadian citizen or legal resident of Canada and have lived there for at least 10 years after reaching 18.
Similar to CPP payments, OAS payments are also taxable and considered part of your income in any given year.
CPP Tax Deductions?
Since CPP payments are treated as taxable income, you will be responsible for paying taxes on the payments at the end of each year. If a larger amount of CPP payments accumulate over the course of the year, you may be responsible for paying a substantial amount in taxes at the year’s end.
An alternative to paying your taxes at year-end is to request that the government withholds a specific amount of money (or a specific percentage) from each payment, which will go towards paying the taxes on the payment. This is done by completing a request for voluntary federal income tax deductions form.
From an investment perspective (time value of money), it makes the most financial sense to defer paying taxes for as long as possible, especially if payments can earn some sort of rate of return. I do not recommend requesting that taxes be voluntarily withheld unless absolutely necessary.
CPP payments, similar to OAS payments and most income payment streams in Canada (with very few exceptions) are taxable benefits, meaning that they are considered income and will require taxes to be paid at year-end.
Starting CPP payments at a later age (closer to 70 years of age rather than 60) will allow you to get a higher amount of money from the government. The decision about when to start CPP payments will depend on your personal circumstances.
Make sure not to overly rely on CPP payments throughout retirement, as they are typically very modest. A good retirement plan will typically include CPP payments, as well as other income sources from other assets.
If you want to get a comprehensive overview of income streams in retirement, take a look at my thorough guide outlining retirement income sources in Canada.