CPP and EI Deductions Explained: How They Affect Canadian Paychecks

If you receive a salary in Canada, you've probably noticed that your take-home pay is significantly lower than your gross salary. Beside federal and provincial income taxes, two mandatory deductions appear on almost every Canadian paycheck: the Canada Pension Plan (CPP) and Employment Insurance (EI).

Understanding how these deductions are calculated, when they stop, and how the new CPP2 tier affects your paycheck can help you plan your household cash flow more effectively.

1. Canada Pension Plan (CPP)

The Canada Pension Plan is a retirement pension program administered by the federal government. Most working Canadians over the age of 18 must contribute to the CPP based on their employment earnings.

How CPP is Calculated:

• Basic Exemption: The first $3,500 of your annual income is exempt from CPP contributions.
• CPP Rate: You pay 5.95% on your earnings above $3,500, up to the maximum pensionable earnings.
• Employer Match: Your employer matches your 5.95% contribution dollar-for-dollar. If you are self-employed, you must pay both the employee and employer portions (totaling 11.9%).
• Maximum Pensionable Earnings (YMPE): For 2025, this ceiling is set at $71,300.
• Maximum Employee Contribution: The maximum you will contribute under the first tier of CPP in 2025 is $4,034.10.

2. The New Second Tier: CPP2

Starting in 2024 and fully implemented in 2025, the government introduced a second tier of CPP contributions (CPP2) to increase retirement benefits for middle and high-income earners.

If your income exceeds the primary CPP ceiling ($71,300 in 2025), you will contribute to CPP2:

• CPP2 Rate: You pay 4.00% (matched by your employer) on earnings between $71,300 and the second ceiling.
• Year's Additional Maximum Pensionable Earnings (YAMPE): For 2025, this second ceiling is $81,900.
• Maximum CPP2 Contribution: The maximum employee contribution for CPP2 in 2025 is $424.00.

3. Employment Insurance (EI)

Employment Insurance provides temporary financial assistance to unemployed Canadians, as well as those taking maternity, parental, or sickness leave. Unlike CPP, there is no basic exemption for EI — you pay EI from your first dollar of earnings.

How EI is Calculated:

• EI Rate (Outside Quebec): For 2025, the employee rate is 1.66% of insurable earnings. Employers pay 1.4 times the employee rate (2.32%).
• EI Rate (Quebec): Because Quebec runs its own parental insurance plan (QPIP), the federal EI rate is lower at 1.25%.
• Maximum Insurable Earnings: For 2025, the limit is $65,700.
• Maximum Contribution: The maximum employee EI contribution in 2025 is $1,090.62 (outside Quebec).

The "Pay Raise" in the Second Half of the Year

Because CPP and EI contributions have annual maximum caps, high-earning Canadians will hit these limits during the year. Once you reach the maximums, CPP and EI deductions will stop appearing on your paycheck, leading to a noticeable increase in your take-home pay for the remaining months of the year.

For example, if you earn $100,000, you will hit your EI max around August and your CPP max around September. For the rest of the year, your monthly take-home pay will increase by hundreds of dollars. Many Canadians use this temporary "pay raise" to boost savings or make lump-sum debt payments.