Final answer:
CPP must be prorated when a person does not contribute for the entire year, likely due to starting or stopping work, reaching age 18 or 70. To do this, calculate CPP based on pensionable earnings during the contributable months using the current CPP rate and adjust according to the annual contribution limit proportionally.
Step-by-step explanation:
The Canada Pension Plan (CPP) must be prorated when an individual does not contribute to the plan for the entire year. This situation can arise when a person starts or stops working partway through the year, reaches the age of 18 (which is when CPP contributions begin), or reaches the age of 70 (when CPP contributions cease). Prorating the CPP involves calculating the amount of contribution based on the number of months for which contributions are required in that particular year. To prorate CPP, you need to first determine the individual's pensionable earnings for the period of the year during which they are required to contribute. Then apply the current CPP contribution rate to those earnings. Divide the annual CPP contribution limit by 12 and multiply it by the number of months the individual contributed to get the maximum proratable CPP contribution. The lesser of this computed amount and the actual contributions based on the earnings will be the prorated CPP contribution for the year.