Canada Pension Plan

Canada Pension Plan is a monthly retirement taxable benefit that replaces part of your income when you retire. It was created in 1965 by the Liberal government of Lester B. Pearson. Besides the province of Quebec, it’s mandatory that employers and employees must contribution to the pension plan.  Quebec has its own version of the plan called the Quebec Pension Plan.

To qualify for Canada Pension Plan, an individual must be:

• be at least 60 years old
• have made at least one valid contribution to the CPP

Canada Pension Plan will pay monthly benefits to qualified contributors:

• in retirement,
• to disabled contributors and their children,
• to widows, widowers and orphaned children of deceased contributors

As well, a lump sum death benefit is payable to the estate of the deceased contributor.

Contributory Period

Anyone over 18 who earns more than the minimum amount of $3,500 per year is eligible to contribute to the plan, with the exception of Quebec. 

• Basic Exemption Amount: The $3,500 per year is known as the basic exemption amount and it’s the amount you’d have to be earning before you’re eligible to contribute to the CPP. Anything below that is not subject to CPP Contributions. Since 1998, the YBE has been frozen at $3,500.

As well, if you have contributed to the CPP through employer/employee premiums on your pensionable employment income, you’re eligible to receive Canada Pension Plan benefits.

The contribution period commences on the individual’s 18th birthday and extends to age 60 or 70 if the individual continues to work and does not enroll to receive a retirement pension.

• Standard Contributory Period: The standard contributory period is 47 years with the max being 52 years. If you subtract 65-18, you arrive at 47 years. 
• Max Pension: To receive the max pension, you’d have to contribute at least 83% of the time. 83% of 47 is 39 years. You must contribute to the plan for 39 years and the contribution should be sufficient.
• Yearly Maximum Pensionable Earnings (YMPE): CPP uses something called the YMPE to assess whether you contributed enough. To summarize, if your income was less than $58,700 in 2020 then you have not contributed enough to the CPP to qualify for the maximum pension within that 39 year period. If your earnings was higher than $58,700 for 2020, you’ll notice towards the end of the year, your pay is a bit higher as you’ve reached the maximum CPP contribution for the year.
  • The YMPE is adjusted annually to reflect changes in the average wages and salaries.

Contribution Rates

When it comes to Canada Pension Plan contributions, both the employee and their employers must make CPP contributions based on a percentage of the employee’s contributory earnings. The contribution rates are below. A self employed person must contribute both the employer and the employee shares.

2020 Max Annual CPP Contribution = 5.25% * ($58,700 – $3,500)

Employee: $2,898 + Employer: $2,898 = $5,796

Contributory Earnings

Contributory Earnings to the Canada Pension Plan is essentially all the employment earnings above the Year’s Basic Exemption Amount ($3,500) and up to the Yearly Maximum Pensionable Earnings (YMPE). For 2020, the YMPE is $58,700.

• Example – In 2020 Janice, age 34, is expected to earn $90,000 as a deli manager at Loblaws. How much in CPP contributions need to be paid in 2020?
  • Janice’s pensionable earnings is $90,000. We would use the lesser of total pensionable earnings and YMPE (i.e. lesser of $90,000 or $58,700) which is $58,700.
    • $58,700 – $3,500 = $55,200
    • Employee Contribution: 5.25% * $55,200 = $2,898
    • Employer Contribution: 5.25% * $55,200 = $2,898
• The contribution rates for employees and employers is ever changing in accordance with salaries and wages.

Exempt Workers

• Certain type of income is not considered pensionable employment and thus exempt from CPP deductions

1. Individuals not earning more than the exempt amount of $3,500
2. Migratory Workers who are not employed for at least 25 days a year and who do not earn at least $250 a year from the same employer
3. Casual Workers
4. Members of Religious Orders whose earnings are turned over to the order
5. Election Workers –  CPP is not deducted if both requirements are met – worker is not a regular employee of the government body and works less than 35 hours in a calendar year.

Eligibility – CPP Retirement Benefits

To be eligible for a retirement pension from Canada Pension Plan, an individual must have:

• Have made at least one valid contribution to the CPP
  • Valid contributions can be either from work in Canada or as a result of credit splitting form a former spouse which more information can be found below.
• Have reached the minimum age of 60
  • The earliest you can take CPP is one month after your 60th birthday. Each month that you wait to take CPP, the benefit goes up. Refer to below or the article When to apply for CPP?

CPP Adjustment Factors

Your Canada Pension Plan monthly benefit depends on several factors, such as

• Age you decide to start your pension
• How long and how much you contributed
• Your average earnings throughout your working life

In 2019, the maximum amount that you could receive at standard retirement age of 65 was $1,154.58. The average monthly benefit is $679.16. Depending on the factors listed above, your situation will determine how much you should receive.

When should I take Canada Pension Plan?

This is the million dollar question. The earliest you can take CPP is age 60 but what would happen if you waited until 65? What about 70?

• If you start before age 65, payments will decrease by 0.6% each month or 7.2% per year, up to a maximum reduction of 36%, if you took it at 60. (7.2% per year x 5 years from 60-65 = 36%)
• If you start receiving your pension after age 65, payments will increase by 0.7% each month or 8.4% per year, up to a maximum increase of 42%, if you took it age 70. (8.4% per year x 5 years from  65-70 = 42%)

Example: Joe is 60 years old and is thinking about retirement. If he waits until 65, his CPP pension would be the 2019 maximum of $1,154.58. Joe doesn’t want to wait that long and decides to commence his CPP at 60.

• Joe’s CPP Benefit at Age 60 = $1,154.58 * (1-0.36) = $738.93
• Joe’s CPP Benefit at Age 70 = $1,154.58 * (1.42) = 1,639.50

Drop Out Provisions

Drop-out provisions of the CPP refer to years of employment where you might have had low or zero earnings. As discussed above, your CPP retirement benefit is based on your pensionable earnings from the age of 18, also known as your contributory period. If you “drop out” these low earning years, your CPP benefit will be higher in retirement. Low earning years could be for a variety of reasons such as:

• Going to School
• Unemployment
• Child Rearing
• Taking Care of a Family Member

To offset these low earning years, CPP offers protection by dropping a number of months of low earning years. 

How many years can I drop out?

Since 2014, the general drop out provision has been 17% of months in a person’s career which means that you can drop off (65-18 = 47 years, 17% of 47 is 8 years.) Canada Pension Plan automatically drops 8 years of your lowest earnings automatically.

How to Calculate Canada Pension Plan

• The easiest way to find out what your Canada Pension Plan retirement benefit will be is to use the Canadian Retirement Income Calculator. This will provide you with retirement income information such as CPP and OAS (Old Age Security).
  • You would need to following documents in order to get accurate information.
    • Statement of Contributions
    • Financial Information regarding your employer pension
    • Recent RRSP statements
    • Statement of other savings such as annuities, foreign pensions; survivor pensions, etc).

Post Retirement Benefits 

Since 2012, an employed individual, between the ages of 60-65, who continues to work must continue to make CPP contributions until they reach age 65. Employers should match the contributions as well. After 65, CPP contribution is not mandatory but at the option of the beneficiary. Employers must contribute to the CPP if the employee elects to do so as well. This contribution provides the employee an additional amount of retirement benefits, known as the Post Retirement Benefit (PRB). No application is required.

• The maximum Post Retirement Benefit is equal to 1/40th of the maximum CPP retirement pension. In 2019, the maximum CPP payout was $1,154.58 per month. PRB would have been $28.86.
• Each year of work after 65 creates an additional PRB that is paid the following year and will continue to do so during the life of the beneficiary.

Canada Pension Plan Pension Sharing

Spouses and common law partners can choose to share their Canada Pension Plan retirement pension with one another in order to realize tax savings. In order to do so, you must:

• Be receiving the pension or be eligible to receive it
• Be living with your spouse or common-law partner
• Be at least 60 years of age or older
• Both receiving CPP unless only one is a contributor

Sharing the Canada Pension Plan pension can result in reduction of your total income taxes as you’re shifting some of the income from the person in the higher tax bracket to the person with the lower tax bracket. With pension sharing, each person would receive a portion of the other person’s retirement pension. This portion is based on the time that the couple have lived together, in relation to their contributory period.

•  Pension splitting will consists of two parts:
  • Assignable Pension
    • The assignable part should be split equally with your spouse. 
    • Both spouses’s pension has to be assigned, not just the pension of the one with the higher income.
  • Unassignable Pension

 Example of CPP Pension Splitting 

Jorge and Natalie have been married for 20 years. They have both been working for 25 years and have the same number of years of contribution to the CPP. Jorge is entitled to a CPP Pension of $700 per month while Natalie is entitled to $350 per month.

They can assign 80% of their pensions. (20 years married or cohabitation divided by 25 years of contribution). Their new pensions would be calculated as:

Jorge’s monthly CPP pension will consist of two parts

• Assignable Portion
  • ($700 * 80% = $560) = $560 is the amount that can be assigned.
• Unassignable Portion
  • ($700 – $560 = $140) = $140 is the amount that cannot be assigned.

Natalie’s monthly CPP pension will consist of two parts

• Assignable Portion
  • ($350 * 0.80 = $280) = $280 is the amount that can be assigned
• Unassignable Portion
  • ($350 – $280 = $70) = $70 is the amount that cannot be assigned

The total assignable CPP is $560 + $280 = $840. That amount would be split equally with half being paid to the spouse. The assigned portion would be $840 divided by 2 = $420. ($840 / 2 = $420)

New Pension Amount – Jorge & Natalie
Jorge’s new monthly pension after assignment is $420+$140= $560.(Jorge’s assignable portion + non assignable portion)

Natalie’s new monthly pension after assignment is $420 + $70 = $490. (Natalie’s assignable portion + non assignable portion)

As  you can see, through CPP pension splitting, you have effectively transferred income from a higher tax bracket (Jorge) to a lower tax bracket (Natalie). 

CPP Credit Splitting

The subject of credit splitting usually comes up when couples are going through a separation or divorce. The CPP contributions you and your spouse or common-law partner made during the time you lived together are known as CPP pension credits.  When a relationship ends, the credits can be split equally between the couples. This is called credit splitting.

• Credits can be split even if one spouse or common-law partner did not pay into the CPP.
• Usually credits of one spouse is increased while the other is decreased.
• CPP credits are equalized for the period of cohabitation

Credit splitting is mandatory upon divorce in most provinces even with a written separation agreement. The provinces of British Columbia, Saskatchewan and Quebec allow former spouses to opt out. 

The request for credit splitting could be made by either spouse or their lawyers. In regards to time limits, for common law relationship, an application should be filed within 4 years of living apart. There is no time limit for spouses.

Canada Pension Plan Survivor Benefits

Canada Pension Plan provides survivor benefits to the estate of a deceased qualified CPP contributor. There are three types of CPP Survivor Benefits. CPP survivor’s benefit include:

• Death Benefit
• Survivor’s Pension
• Orphan’s Benefit

To receive survivor’s benefits, the deceased spouse must have made enough contributions to the CPP. Each benefit is discussed below.

Canada Pension Plan Death Benefit

Canada Pension Plan provides a lump sum death benefit to help families of the deceased contributor with funeral expenses and the hardship that they might be facing. This benefit can be used for any purpose. Most Canadians are not aware of this benefit.

Eligibility

The contributor must have made contributions to the CPP for at least:

• one-third of the calendar years in their contributory period for the base CPP, but no less than 3 calendar years; or
• 10 calendar years.

How much is the benefit?

• As of January 1, 2019, the amount of the death benefit for all eligible contributors is a flat rate of $2,500.
• Formal application with the death certificate should be filed.

The death benefit is payable to the estate of the deceased. In most cases, the benefit is paid directly to the surviving spouse or common-law partner.

How to Apply?

Formal application should be filed. The form is called Application for a Canadian Pension Plan Death Benefit. Make sure you include certified true copies or originals regarding the required documentation. Mail the application to the closest Service Canada Centre.

Survivor’s Pension

The survivor of the deceased contributor who meets the qualifications may be eligible for a survivor’s pension. 

The value and timing of the payments depend on

• whether you are younger or older than age 65
• how much, and for how long, the deceased contributor has paid into the CPP

The CPP first calculates what the retirement pension would have been of the deceased had the individual been age 65 at time of death. A further revision is then made based on the survivor’s age at time of death.

How to Apply?

Make sure you apply as soon as possible after the contributor’s death. Delaying the application may cause you to lose benefits as the CPP can only make back payments for up to 12 months.

To apply, make sure you complete the form titled Application for CPP Survivor’s pension and Childrens) Benefits and mail it to the address indicated.

 A survivor’s pension is not terminated upon remarriage or entering into a new common-law relationship. If a person is entitled to receive more than one survivor’s pension, the larger amount will be paid.

Note: The combined Survivor’s and Retirement pension CANNOT exceed the Maximum Retirement Pension Amount.

Orphan Benefits

Canada Pension provides a monthly child benefit to dependent children of disabled or deceased CPP contributors.

The child must be either:

• under age 18; or
• under age 25 and in full-time attendance at a recognized school or approved educational institution.

A child of a deceased contributor may receive a monthly benefit up to 18 years old. If they’re enrolled in a recognized school or approved educational institutional, they may receive the benefit until 25. The benefits are suspended if the child reaches age 18 and is not enrolled in school full time but may be reinstated if they go back to school.

There are two types of children benefits

• Disabled contributor’s benefit – monthly payment to children of a person who is receiving a CPP disability benefit. It is discussed below.
• A surviving child’s benefit – monthly payment paid to the child of a deceased contributor. In order to the benefit to be paid, the deceased contributor must have made enough contributions to the CPP.

How much can the child receive?

• As of 2019, the monthly children’s benefit is $250.27. It is adjusted annually.

Disability Benefits

Disabled contributors may be eligible to receive a disability pension and their children may also be eligible to receive a disabled contributor’s child pension. A person is considered disabled under the Canada Pension Plan if they suffer from a severe and prolonged disability. It can be physical or mental. According to the CPP,

• Severe means that you have a mental or physical disability that regularly stops you from doing any type of substantially gainful work.
• Prolonged means that your disability is long-term and of indefinite duration or is likely to result in death

Disability benefits are payable only if the contributor meets the minimum contributory requirements.

• have made valid contributions to the CPP in 4 of the last 6 years, or
• have contributed for at least 25 years, including 3 of the last 6 years, and
• and is under the age of 65.

The maximum disability benefit is greater than the maximum retirement benefit ($1335.83 vs $1134.17) 

• At age 65, the disability pension is converted to a retirement pension.  
•  A contributor between ages of 60 and 64 cannot receive both a retirement pension and a disability pension.

The amount of disability you will receive consists of a flat rate of $485.20 which is fixed for all recipients plus a 75% of the contributor’s retirement pension to a combined maximum of $1335.83. Keep in mind that the total amount of survivor and disability pension amount cannot exceed the disability benefit for the year.

Pension of Children of Disabled Contributors

A disabled contributor’s child may be eligible to receive a monthly pension of up to 18 years of age or up to 25 years old if  they are enrolled in an approved educational institutional. The disabled parent must satisfy the minimum contribution requirements discussed above.

• The monthly children’s benefit is a flat rate of $250.27 a month.
• It is the same as the orphan’s benefit under both the CPP and QPP.

Taxes of CPP Benefits and Contributions

Canada Pension Plan benefits are considered taxable income to the beneficiary.

• Employers
  • Employers are able to deduct their contributions on behalf of the employee as an expense
• Employees
  • Contributions by employees result in non refundable federal and provincial tax credits
• Self Employed
  • Self employed individuals are able to claim non refundable federal and provincial tax credits
  • If they have hired employees, they can deduct their contributions as an expense.