Should You Have Tax Deducted from CPP in Canada?
If you’re receiving Canada Pension Plan (CPP) payments, you might be wondering:
Should I have tax deducted from my CPP?
The short answer: it depends on your total income.
CPP payments are considered taxable income in Canada, but unlike employment income, tax is not automatically deducted unless you request it. This can lead to unexpected tax bills if you’re not prepared.
Is CPP Taxable in Canada?
Yes — CPP is fully taxable income.
That means:
- You must report CPP on your tax return
- It gets added to your total annual income
- You may owe tax depending on your income level
Even though CPP is a government benefit, it is treated similarly to other income sources when calculating taxes.
What Happens If You Don’t Deduct Tax from CPP?
By default, CPP payments come with little or no tax withheld.
This means:
- You receive the full CPP amount each month
- But you may owe taxes when filing your return
For many Canadians, this results in a surprise tax bill at the end of the year.
Should You Deduct Tax from CPP?
This depends on your situation.
You may NOT need deductions if:
- CPP is your only income
- Your total income is relatively low
You SHOULD consider deductions if:
- You have part-time employment income
- You earn investment income (dividends, capital gains, etc.)
- You receive other pensions or benefits
- You’ve owed taxes in previous years
👉 In these cases, deducting tax upfront can help avoid a large bill later.
How Much Tax Should You Deduct from CPP?
There’s no exact rule, but many Canadians choose:
10% to 15% of their CPP payments
However, the right amount depends on:
- Your province (tax rates vary across Canada)
- Your total annual income
- Available deductions and tax credits
If you want a more accurate estimate, you can calculate your expected tax bracket based on your total income.
Example Scenario
Let’s say:
- You receive CPP payments
- You work part-time
- You also withdraw income from investments
Even if some of your income is already taxed, your combined income may push you into a higher tax bracket.
In this situation:
- Not deducting tax from CPP → could result in a tax bill
- Deducting 10–15% → can help balance things out
👉 This is one of the most common scenarios where deductions make sense.
How to Request Tax Deductions from CPP
You can request voluntary tax deductions through Service Canada.
To do this, complete:
Form ISP-3520 — Request for Voluntary Federal Income Tax Deductions
Once submitted:
- A percentage will be deducted from your CPP payments
- You can update or change it later if needed
Can You Change the Deduction Amount Later?
Yes — and this is important.
You can:
- Increase or decrease your deduction
- Stop deductions entirely
👉 This gives you flexibility as your financial situation changes over time.
Final Thoughts
CPP is taxable, but whether you should deduct tax upfront depends on your full financial picture.
If you have multiple income sources, it’s usually safer to deduct some tax to avoid surprises.
If you’re unsure, even a small deduction is often better than none.
What’s Next?
👉 Learn how Lunio calculates taxes
👉 Learn when to charge GST/HST