(NC) Whether it’s your first job and you’re surprised by how little your take-home pay is, or you’re a career veteran who’s never really thought about the regular deductions that come off your paycheque, it’s important to understand what’s being deducted and why.
Canadian employers are required to make three deductions from employee paycheques. The first covers income tax, the second is a contribution to Employment Insurance (EI) and the third goes into the Canada Pension Plan (CPP) Fund. There can be others – union dues or covering an employer-sponsored retirement plan for example – but these three apply broadly.
The amount of income tax deducted is based on how much you make and includes deductions for taxable benefits, such as parking or a leased vehicle.
EI premiums are deducted from your pay at a rate set each year by the federal government. Your employer also contributes to EI, which provides you with temporary financial assistance while unemployed and looking for work or if you’re upgrading your skills.
The CPP Fund is designed to provide you with a portion of your retirement income, in addition to what you can save elsewhere. It is funded through employee and employer contributions, along with investment earnings. The Fund provides workers and their families with a basic level of income in retirement. The contribution is deducted from your pay if you are 18 years of age or older and earn more than $3,500 per year.
Government enhancements to expand CPP are designed to replace about a third of your average annual wages, up to an annual limit.
How the deductions are used
While your deductions for income tax and EI go into general government revenues, CPP deductions are treated differently. They are credited to a special ‘CPP account’ that can only be used to pay out current retirement and other benefits and CPP expenses. Any funds left over are transferred to CPP Investments, the professional investment organization that invests the CPP Fund independent of government. Investments are diversified by asset class and geography so that the Fund remains resilient as it achieves growth in global markets over time.
This active management approach has resulted in assets of $523 billion and an average annual return during the past ten years of 10.3 percent after all costs, as of June 30, 2022.
The Office of the Chief Actuary, the independent government body that assesses the viability of the CPP, confirmed in its latest study that the CPP is sustainable for the next 75 years – good to know if you’ve just received your first pay cheque and are wondering what that deduction means.
To learn more about CPP Investments, visit cppinvestments.com.