Last updated: June 11 2008

What Employees Being Trained in Payroll Need to Know About CPP and EI

Canada Pension Plan (CPP)

The Canada Pension Plan is a mandatory contributory, earnings-related social insurance program. It provides some protection to contributors and their families against the loss of income due to retirement, disability and death by providing a pension.

CPP must be deducted from an employee's earnings if that employee:

  • is 18 years or older, but younger than 70,
  • is in pensionable employment during the year, and
  • does not receive a CPP retirement or disability pension.

Each employer is also required to contribute the same amount of CPP that is deducted from their employees pay.

Most, but not all, earnings are pensionable. Some examples of earnings not subject to CPP contributions would include: pension payments, death benefits and payments made after an employee dies, except for amounts the employee earned and was owed before the date of death.

Employment Insurance (EI)

Employment Insurance is a social program that provides assistance to workers who lose their jobs. It also provides maternity, parental, and sickness benefits for employees who are unable to work temporarily. Participation is mandatory for all employees who qualify and for their employers.

Like CPP, most earnings are subject to EI deductions ñ these are known as insurable earnings.

Employers are required to contribute at a rate of 140% of the employee contribution to employment insurance.  That is, for each $1.00 that is deducted from the employee's paycheque for EI premiums, the employer must remit $2.40.

There is one very important area to be aware of here though. Earnings of an employee whose conditions of employment are not those of an ìarms lengthî employee are not insurable.

It is always a question of fact as to whether an employee's conditions of employment meet this test. Generally, the issue is only important whenever the employee is related to the employer in some way. Related persons are individuals connected by blood relationship, marriage, common-law relationship, or adoption. Where the employer is a corporation, the employee will be related to the corporation when the employee is related to a person who either controls the corporation or is a member of a related group that controls the corporation. If such an employee enjoys employment conditions that an arm's length employee would not ñ unreasonably high or low pay, irregular working hours, no formal responsibilities, etc. ñ the employment is not insurable.  In addition, the employment of a person who is employed by a corporation and who controls more than 40% of the voting shares is not insurable.

Excerpted from Advanced Payroll for Professional Bookkeepers, one of the courses that comprise the DFA, Certified Bookkeeping Specialist designation program.