CPP deduction - From Rags to Reasonable

*I am not a tax professional. This is meant to be an educational tool and NOT a recommendation. Each personal situation is different and there’s a lot of grey area in self-employed deductions. If you have questions (even just little ones) … talk to a tax expert.*


When you’re an opera singer at tax time two things might be true:

  • You might not have made an insane amount of money
  • You might have a ton of deductions

A combination of these two things means that a lot of us end up reducing the amount of tax we owe to … if not zero… then … not a ton.

It’s not cheating or tax evasion… it’s just a representation of income and the high cost of trying to find work in the opera world.

But the fun surprise at the end of your tax journey is… you still usually have to pay something.

No… it’s not tax… it’s CPP (Canada Pension Plan).

What is the CPP and why does it want all my money?

The Canada Pension Plan is a government fund that everyone who works in Canada contributes to as long as they:

  • are 18 or older
  • make more than $3,500 a year

It’s a program that’s really going to help you with that whole ‘how the heck am I going to actually retire’ problem.

So yes, it may suck to pay into it now… but future you will be thankful.

How much money is ‘all the money’?

The CPP takes 9.9% of the money you make (over the “year’s basic exemption” of $3,500).

So, if you made $40,000 here’s how it would work…

  1. $40,000 – $3,500 (that’s the ‘basic exemption’ I talked about) = $36,500
  2. $36,500 x 9.9% = $3,613.50 (aka: all the money)

A fun self-employed surprise!

Usually with the CPP, the employee pays half, and the employer pays half… but when you’re self-employed you get to be both.

Which means you get to pay both!

Yay?

But the government ‘helps’ you out by giving you a deduction AND a credit for the amounts you pay. You get:

  • a tax DEDUCTION from the employer half
  • and a 15% federal tax credit from the employee half (also a provincial one… it’ll vary between provinces… Ontario is 5.05%)

How sweet is that?

Wait… if I’ve got those sweet deduction/credits going on… why am I still paying all this CPP?

Here’s the thing that I never realized and it kind of blew my mind when I finally learned it.

That CPP deduction, and CPP tax credit only apply to the TAXES that you owe… not the CPP that you owe.

So if you manage to get your taxes owing to zero… you still have to pay the full 9.9% CPP.

The whole kit and/or caboodle.

So yes, that CPP deduction is helpful, and if you owe a fair amount of tax… it’ll all come out in the wash. But it doesn’t mean that you can get away with paying nothing into the CPP and yet still get the retirement benefits later.

The best things in life are most assuredly not free.

… except for puppy hugs…

… those are pretty great…

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