Our recent study found that virtually all Canadian families with children will soon pay higher taxes due to federal income tax changes already in place and forthcoming increases to the Canada Pension Plan (CPP) payroll tax.

If the increased CPP taxes were fully in effect today, 92.2 per cent of Canadian families would pay higher federal taxes. And they would pay $2,218 more per year, on average. (The increased CPP taxes alone translate into $1,624 higher taxes.)

These results prompted a debate on social media and in the comment sections of various news outlets about whether mandatory contributions to the CPP can be considered a tax. Some argue it’s a forced contribution to a pension fund while others call it a “regulatory charge.” The reality, however, is that compulsory contributions to the CPP, which all workers must make by law, are absolutely a tax on workers.

A “tax” is a compulsory contribution for the support of government facilities, programs, services or other spending levied on persons, property, income, commodities and transactions. CPP contributions clearly fit this definition as they are mandatory payments levied on eligible employment income to support a government program—the CPP.

Confusion arises because revenues from the CPP tax maintain a much closer link between the taxes paid and the benefits received than other forms of taxation. Put differently, revenues from CPP payroll taxes are dedicated to the CPP program and a person’s history of CPP payments partly determines the benefits they receive.

That’s one reason why CPP taxes are often mistakenly classified as a forced contribution to a pension plan. There’s an assumption that the money one pays into the CPP is going to fund their own personal retirement, as is the case with private pension plans. But this is largely not the case because CPP premiums paid today are largely used to pay the benefits being received by already-retired Canadian workers (this is referred to as a “pay-as-you-go” plan).

The part of the CPP that is not pay-as-you-go is based on the reserves—that is, the contributions made today in excess of what’s needed to finance CPP benefits today—that are invested by the CPP Investment Board. But 80 per cent of the CPP is “pay-as-you-go,” which means most of the contributions you make today fund someone else’s retirement. Put differently, the CPP more closely resembles a transfer program for seniors than a true self-financed pension program.

The reality that CPP resembles a transfer program rather than a traditional pension plan is even more apparent when you consider that CPP tax payments do not provide the same ownership rights that private pension plans typically do. For example, CPP benefits cannot be fully bequeathed on death like most pension plans (spouses get only partial benefits if one passes away, but only if they are not eligible for benefits on their own). Indeed, the program is designed so Canadians who die early in life subsidize those who live longer.

In addition, there are significant limitations on CPP payments. Unlike RRSP contributions, CPP payments cannot be withdrawn in cases of hardship (financial or health-related), to fund a down payment on a home, or to help support the costs of education upgrading.

And crucially, there’s no legal obligation for the government to provide a defined amount of benefits (or any at all, for that matter). Indeed, the government has previously increased mandatory contributions without commensurate increases to CPP benefits.

Bottom line: CPP contributions are a tax, and the coming increase, along with federal income tax changes already in place, means that the vast majority of Canadian families will pay more in taxes.