Canada Pension Plan (CPP)

The CPP is a social insurance plan funded by payroll contributions. Almost every employee aged 18 to 69 who works outside Quebec pays in, and the employer matches every dollar. Self-employed people pay both halves. Quebec runs a parallel plan, the Quebec Pension Plan (QPP), for anyone whose province of employment is Quebec.

Contributions come in two tiers. For 2026, employees and employers each pay 5.95% of earnings between a $3,500 basic exemption and the year’s maximum pensionable earnings of $74,600. A second tier, called CPP2, adds 4% each on earnings from $74,600 up to $85,000. Like the Social Security part of US FICA payroll tax, contributions stop at a ceiling, so earnings above $85,000 neither cost anything nor earn any extra pension.

Once it is in payment, the pension rises each January when the Consumer Price Index goes up, a built-in cost-of-living adjustment that keeps its buying power for life.

Three things set your pension: how much you earned and contributed, for how many years, and the age you start it. One valid contribution qualifies you, but a thin record earns a small pension.

The original, or base, CPP replaces one quarter of your average earnings up to the yearly ceiling. The enhancement that began in 2019 raises that to one third, and CPP2 lifted the covered-earnings ceiling by 14% over 2024 and 2025. The enhancement builds up slowly: Service Canada says it will raise the maximum pension by more than 50% for people who make enhanced contributions for 40 years, so people retiring now receive only part of it.

Several provisions protect people with weak years. For the base component, the general drop-out ignores up to 8 years of your lowest earnings; the enhanced component uses your best 40 years. A child-rearing provision can help if you had low or no earnings while raising children, and months on a CPP disability pension are excluded. After a divorce or separation, the pension credits a couple built while living together can be split between them. Your Statement of Contributions from Service Canada shows the record your own pension is built from.

The standard start age is 65, but you can begin as early as 60 or as late as 70. Each month before 65 cuts the pension by 0.6%, up to 36% at 60. Each month after 65 raises it by 0.7%, up to 42% at 70. Waiting past 70 adds nothing. The adjustment lasts for life, and later inflation increases build on whatever amount you locked in.

The choice trades a smaller pension for more years against a larger one for fewer. Starting early can suit people in poor health or with no other way to cover their early sixties. Delaying can suit people with long family lifespans or RRSP savings that can pay the bills in the gap years. A later start also works as insurance against longevity risk, because the bigger check lasts as long as you do. Compared with US Social Security, CPP opens two years earlier and grows a little faster when delayed: 8.4% a year, against 8% a year in delayed retirement credits.

The pension does not start on its own: you must apply, and you can do so up to 12 months before the start date you choose. If you apply after 65, you can ask for up to 11 months of retroactive payments, but never for a month earlier than the one after your 65th birthday.

You do not have to stop working to collect CPP, and work income does not reduce your pension, unlike the US Social Security earnings test. If you work while receiving CPP before 65, contributions continue and are mandatory. From 65 to 70 you can elect to stop. Those contributions buy a post-retirement benefit, an extra lifetime monthly amount paid on top of your retirement pension.

CPP is taxable income, and tax is not deducted automatically. Unless you ask Service Canada for monthly tax deductions, you may owe tax when you file. CPP is never clawed back, but it counts toward the net income that drives the recovery tax on Old Age Security, so a large CPP pension on top of RRIF withdrawals can push a retiree over that threshold.

For people who retire in the United States, the IRS says social security benefits paid by Canada to US residents are treated as US Social Security for federal tax. Up to 85% can then be taxable, depending on your provisional income.

Canadian retirement income usually comes in three layers. Old Age Security is the base: a residence-based pension from 65 that shrinks at higher incomes. CPP sits on top of it and depends entirely on your contribution record. Personal savings in an RRSP, a TFSA or a workplace Pension make up the rest.

Because CPP replaces only part of earnings up to a ceiling, higher earners lean more on their own savings. A worker earning $150,000 in 2026 still builds CPP only on the first $85,000, so the income replacement ratio from CPP alone falls as pay rises.