Pensionable and insurable earnings
This document provides information on pensionable and insurable earnings.
All employers are required by law to deduct Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums from most amounts they pay to their employees. Employers must remit these amounts to the Canada Revenue Agency (CRA) along with their share of CPP contributions and EI premiums. More information on employer responsibilities and obligations can be found through our Payroll menu page.
The Canada Pension Plan (CPP) came into effect on January 1, 1966 to give Canadian workers a foundation to base their retirement income on. The CPP is a mandatory plan and employees generally make contributions given the fact that they hold pensionable employment in Canada. Pensionable employment is any employment for which a pension plan or fund has been set up. This means that an individual who holds pensionable employment in Canada will normally make contributions to the CPP, regardless of whether this individual is a resident or citizen of Canada.
In the mid 1990's, the unemployment insurance program was reformed and became known as employment insurance. It shifted from a system where coverage was based on the number of weeks worked (unemployment insurance) to a system based on total earnings where the coverage is counted from the first dollar paid and the first hour worked (Employment Insurance).
Actual nature of payments
In order to determine if the amounts paid to an employee are considered pensionable and insurable earnings, it is important to establish the actual nature of the payments. Sometimes the terms used to describe a payment do not necessarily correspond to the actual nature of the payment. (For example, is a payment considered a dividend or salary?).
An employee who holds pensionable employment makes contributions to the CPP through withholdings on the salary and wages paid by the employer. This amount is obtained by multiplying the contribution rate by the contributory salary and wages (subject to the maximum contributory earnings). The employer must also pay an equivalent contribution.
The pensionable earnings correspond to the contributory salary and wages and include the following types of income:
- a person's income from pensionable employment calculated in accordance with the Income Tax Act (ITA) subject to certain adjustments;
- the salary and wages of a person who is a contributor under the Public Service Superannuation Act as defined in that Act;
- if an election has been filed to include in pensionable employment the employment of an Indian, as defined in the Indian Act, then any income from that employment will be included in the amount of that person's contributory salary and wages.
Contributory salary and wages do not include the earnings received:
- before the worker reaches 18 years of age;
- during any month that is excluded from that person's contributory period under the CPP or under a provincial pension plan by reason of disability;
- after the worker reaches 65 years of age if a retirement pension is payable to him or her under the CPP or under a provincial pension plan and they make an election to exclude the income using form CPT30; or
- after the worker reaches 70 years of age.
What do we mean by pensionable earnings computed in accordance with the Income Tax Act?
A person's contributory wages and salary for CPP purposes are generally composed of a person's income from an office or employment which is the salary, wages or any other remuneration; including tips and gratuities, received by that person in the year, and calculated in accordance with the ITA.
The value of taxable benefits or allowances is generally pensionable and is therefore subject to CPP contributions. The employer must make deductions from the worker's remuneration.
The ITA provides the method for calculating contributory salary and wages that takes into account gross taxable income (before deductions) except for deductions allocated to a member of the clergy, plus the value of stock options. It can be expressed by the following formula:
Contributory salary and wages = gross taxable income + stock options - deductions allocated to a member of the clergy.
What are the contributory salary and wages of a public servant under the Public Service Superannuation Act?
The Public Service Superannuation Act stipulates that people in the public service must contribute to the superannuation account or the Public Service Pension Fund from their wages.
Pensionable earnings are calculated based on taxable income, so it was necessary to adopt a rule to allow those who have pensionable employment with non-taxable income to include this income in their contributory salary and wages.
For example, a person in the Regular Forces who receives a special allowance, instead of wages, under the Canadian Forces Superannuation Act, or a member of the Royal Canadian Mounted Police who receives an allowance under the Royal Canadian Mounted Police Superannuation Act, must contribute to either the superannuation account or the Public Service Pension Fund. These allowances, which are not taxable, are still considered to be contributory salary and wages. Therefore, the wage and salary amounts that an individual receives and for which the individual is a contributor under the Public Service Superannuation Act are pensionable for CPP purposes, even if these amounts are not included in the individual's taxable income under the ITA.
What are the contributory salary and wages of an Indian under the Indian Act?
The employment of a registered Indian hired under a contract of service, a contract of apprenticeship or who holds an office for which the earnings are not included in calculating income for ITA purposes is excepted from pensionable employment; however, an election can be made which allows an employer to include in pensionable employment the employment of all Indian employees working for the employer which had been excepted under the CPP.
When the employer makes this election by completing Form CPT124, Application for Coverage of Employment of an Indian in Canada under the CPP whose income is exempt under the ITA , the employment income of all Indian employees working for the employer becomes pensionable even if it is not included in the calculation of taxable income.
Contribution to CPP and election of form CPT20
An employee or a self-employed worker may elect to pay a contribution on contributory salary and wages from their employment by completing Form CPT20, Election to Pay CPP Contributions, (for a list of all situations in which an election can be made, please refer to the appendix). For example, the direct gratuities that an employee receives as part of pensionable employment.
An employee who holds insurable employment pays EI premiums through withholdings on the salary paid by their employer. This amount is obtained by multiplying the insurable earnings (subject to the yearly maximum) by a premium rate set each year by the Office of the Chief Actuary. The employer must also pay their share of the premium, which is 1.4 times the employee's premium (unless the employer provides a short-term disability plan that meets certain requirements, then the employer pays a rate that is less than the standard rate).
The Insurable Earnings and Collection of Premiums Regulations (IECPR) define insurable earnings as the total amount of earnings that a person has from all insurable employment, with certain exceptions. To be considered as insurable earnings, an amount has to be:
- paid in cash;
- paid by the person's employer; and
- received and enjoyed by the person in respect of that employment.
1. Paid in cash
Insurable earnings must be paid partially or totally in cash. If a worker is paid entirely in cash, then the earnings are entirely insurable.
Generally speaking, if a worker is paid partly in cash and partly in non-cash benefit (in kind), then only the cash portion of the payment is considered insurable earnings.
If a worker is paid entirely in non-cash benefit (in kind), then there are no insurable earnings.
What is a non-cash benefit and a cash benefit?
A benefit is considered to be non-cash when:
1. The employer provides or pays for a good or service to the worker.
The employer gives a worker a bus pass.
2. The employer pays a third party for a good or service that is provided to the worker; and the employer remains responsible for the expense.
The employer gives the worker a credit card to pay for gas for the company car. The worker uses this card to buy gas for his personal car as well. The credit card belongs to the employer and the worker is not responsible for paying the bill.
A benefit is considered to be cash when:
1. The employer reimburses the worker for the cost of a good or service.
The employer reimburses the worker's monthly parking expenses, even though they are not work-related.
2. The employer pays an amount to a third party for a good or service provided to the worker but the worker remains the owner of that good or service. The worker is responsible for the expenses if the employer does not pay the amount.
The employer pays the worker's tax debt or mortgage payment.
However, there is an exception to the ''insurability'' of a non-cash benefit. If a worker is provided with board and lodging and paid remuneration for the same pay period, then the value of the board and lodging is included in insurable earnings.
The following items are considered to be equivalent to cash because they can be converted into cash:
- postal money orders
- promissory notes
- traveller's cheques
- bank drafts
- payments by credit card
- direct deposits
Certain items, such as gift certificates and smart cards are not included in insurable earnings, because they cannot be converted into cash.
2. Paid by the person's employer
The words "paid" and "employer" have been interpreted in a very broad sense by the courts.
The word "paid" is not limited to situations in which a person has a legal obligation to remit money and may include the simple distribution of money and it includes the act of distributing tips.
For general information about the insurability of paid tips, refer to the explained article titled, "Tips and Gratuities".
The definition of the word "employer" includes a "person" who pays amounts to another person for services rendered in insurable employment. The courts have established that a person's insurable earnings might come from someone other than the actual employer as this term includes a person who pays or has paid earnings to a person for services performed in insurable employment.
This means that a person who is paying an amount to a person for services performed in insurable employment is considered to be an employer for purposes of the Employment Insurance Act.
3. Earnings paid in respect of that employment
This expression also has a very broad meaning.
The courts see it as including any amount paid to a worker under his or her work contract with the employer, even though the worker may not have actually performed any work.
The following examples can be considered as amounts having been paid "in respect of that employment":
- sick pay
- wage loss
- stand-by pay
- signing bonuses
- incentive payments
It should be noted that this list is not exhaustive.
For earnings to be insurable, a person must in fact receive and enjoy the amounts paid. For example, a deceased person could not receive and certainly not enjoy amounts paid to him or her.
Amounts that are not included in insurable earnings
As mentioned earlier, some types of earnings are not insurable earnings:
- Benefits other than in cash are not insurable with the exception of the value of board and lodging enjoyed by a worker in a pay period if cash remuneration is also paid. Benefits in kind and non-monetary benefits are considered to be non-cash benefits.
- Amounts excluded from earnings under the Income Tax Act:
- value of benefits;
- personal or living expenses;
- allowance with respect to employment at a special worksite or remote location;
- certain disability-related employment benefits;.
- Amounts paid to an insured person who is not performing services for his or her employer:
- retiring allowances;
- a supplement paid to a person to increase a worker's compensation benefits (WCB);
- a supplement paid to a person to increase a wage loss replacement benefits;
- a supplement paid to a person under a supplemental unemployment benefit plan;
- payment made to a person to increase a worker's pregnancy, parental, or compassionate care benefits.
- payment made by an employer during the waiting period for pregnancy, parental, or compassionate care benefits.
If a portion of the earnings remain unpaid
If, in the course of insurable employment, a portion of earnings remains unpaid, this unpaid portion may be included in insurable earnings, under certain conditions.
There are provisions within the IECPR which allow the unpaid portion of earnings to be included in insurable earnings in the following situations:
- receivership or impending receivership; and
- non-payment of remuneration for which the person has filed a complaint with the federal or provincial labour authorities.
Requesting a ruling
If a worker or payer is not sure of the worker's employment status, either party can request a ruling to have the status determined. More information on the ruling process is available in How to obtain a ruling for Canada Pension Plan and Employment Insurance purposes.
For more information
To get more information call 1-800-959-5525 .
- Section 12 of the Canada Pension Plan
- Subsection 2(1) of the Employment Insurance Act
- Section 2 of the Insurable Earnings and Collection of Premiums Regulations
- Paragraphs 6(1)(a) and (b), subsection 6(6) and (16) of the Income Tax Act
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