How to calculate Canada Pension Plan in QuickBooks Online Payroll

This article explains how to calculate Canada Pension Plan (CPP), as well as what to check for when it isn't calculating correctly.

What are CPP contributions?

The Canada Pension Plan (CPP) retirement pension is a monthly, taxable benefit that replaces part of your income when you retire. If you qualify, you’ll receive the CPP retirement pension for the rest of your life. 

If you are older than 17 but younger than 70, employed in pensionable employment, and don't receive a CPP retirement or disability pension, an employer will deduct CPP contributions from your pay. With a few exceptions, all employees pay CPP at a rate outlined by the CRA here.

How does QuickBooks Online Payroll calculate CPP contributions?

Quickbooks Online Payroll uses the general CPP formula to calculate CPP which is:

CPP Rate x [Pensionable Earnings - (Annual Exemption / Pay Periods per Year)]

1. Determine the year-to-date pensionable pay up to and including the paycheque being created:
   
   • This includes all pay types except the Reimbursement pay type.
   • This also includes Registered Retirement Savings Plan (RRSP) company contributions.
2. Calculate the basic pay-period exemption:
   1. Annual exemption is $3,500.
   2. Divide the annual exemption amount by the number of pay periods in the employee's pay frequency:
      • Weekly = 52
      • Biweekly (every other week) = 26
      • Semi-monthly (twice a month) = 24
      • Monthly = 12
3. Deduct the amount calculated in step 2 from the amount in step 1.
4. Multiply the difference from Step 3 by the CPP rate found in the T4127. The result is the amount of contributions you should deduct from the employee.

Is CPP not calculating correctly? Things to check:

• Is the employee being paid marked as CPP exempt?
• Has the employee reached the annual maximum contribution (refer to the T4127)?
  • The annual maximum contribution is prorated in the years a person turns 18 or 70.
• Is the employee’s age correct in their profile?
  • Employees won't start contributing until the pay date is after the month they turn 18 years of age.
  • Employees will stop contributing when the pay date is after the month they turn 70.

Year-end CPP audit

The CRA recommends doing an annual year end audit of CPP amounts to make sure employees have had the correct amounts deducted from their paycheques, and doing year end adjustments for anyone who needs them.

When considering employees hired mid year or seasonal employees (defined as any employee who doesn't work one or more pay periods), CPP may have been overcalculated all year when using the general CPP formula. If they're not working at the end of the year, handling overpayments is difficult and employers are not permitted to recover any employer amounts that were overpaid.

Reference pages for CPP:

• Maximum contributions table by year
• Basic Exemption table
• Manual calculation for CPP
• CRA Payroll Deductions Online Calculator