Canada Pension Plan (CPP) is a universal retirement plan for anyone who has worked in Canada through either employment or self employment. Participation is mandatory. The system started in 1966 and the government tracks your contributions and eligibility through your working career. A maximum pensionable earnings figure (called “YMPE”) is set annually and your premiums, and ultimate pension, are determined by your earnings vis-à-vis the YMPE.
Until the mid-’80s, CPP pension payments commenced at age 65 for everybody, along with the universal OAS. However, the rules changed in the mid-’80s to create a system that is more complicated, but also more flexible. Further changes were proposed in the Budget of May, 2009 and approved by Parliament in December, 2009. Now, everybody has the choice of when to commence collecting CPP within a ten-year window from age 60 to age 70. Age 65 is still the “norm”. For every month before or after age 65 that you apply, you will receive a discount (for early application) or a premium (for later application).
Beginning in 2012, if early retirement is chosen, the pension reduction from the amount receivable at age 65 will be gradually increased from .5% to .6% per month for each month younger than 65 over a period of 5 years. The schedule of changes is as follows:
Beginning in 2011, if delayed retirement is chosen, the pension increase over the amount available at age 65 will be gradually increased from .5% to .7% per month for each month older than age 65 and up to age 70 over a period of 3 years. The schedule of changes is as follows:
For instance, in 2012, if you apply at age 60, you would receive 68.8% of your age 65 regular entitlement. The amount you receive upon application is the amount you will receive until death, subject to inflation adjustments, i.e. it does not increase at age 65. Thus, your decision to opt in needs to be considered carefully as a one-time decision with permanent implications. The % reduction factor is actuarially based.
If you are over age 65 and under age 70, you can apply to have the CPP payments commence retroactively to the month after your 65th birthday, or up to 12 months, whichever is less.
If you are over age 65, and under age 70, and you are collecting CPP while still working, you can file an election to stop contributing to CPP using form CPT30. If this scenario fits you, we recommend filing the election as the extra contributions do not increase you CPP benefit enough to warrant the cost of continued contributions.
Up until 2012, if you wish to collect before age 65 then, at the time of application, you must have “substantially ceased working” by the end of the month prior to receiving and also not worked during that first month of receiving. “Substantially ceased working” is defined to mean that your earned income is less than the maximum monthly CPP pension amount (indexed annually, but approximately $960). You may resume working after commencing CPP pension without having to withdraw or pay back any amount. Once you start to receive CPP pension, any future earned income is exempt from paying CPP premiums. This is a one-time decision; after the first six months, you cannot opt in and out.
CPP changes kicked in January 1, 2012, and include some retroactivity for those aged 60 to 69 who presently are collecting CPP Benefits and still working. The changes vary, depending upon what side of age 65 you are.
Age 60 to 65 – contributions mandatory for people in this age group:
For employed workers, their employers will have to recommence deducting CPP contributions from employment income and remit accordingly to CRA, along with their matching contributions.
For self-employed people, they too will be obliged to recommence making CPP contributions (both employer and employee portions) commencing with the 2012 personal tax year. However, they will do so by filling out Schedule 8 on their 2012 tax returns in the Spring of 2013.
Age 65 to 69 – contributions not mandatory for people in this age group:
Re-contributing to CPP in this age group is optional for employed workers; however, the default is to opt-in. In order to opt out of having to contribute, an employee must fill out form CPT30 (which can be accessed on-line at the CRA website), give a copy to the employer and send a copy to CRA at the following address: Winnipeg Tax Centre, Specialty Services Section, 66 Stapon Road Winnipeg MB R3C 3M2. The election to opt out becomes effective the month following receipt of Form CPT30 by the employer. If the employee opts to continue making contributions, the employer will have to continue with their matching amount.
For self-employed people, re-contributing is optional as well. Schedule 8 will be used, starting with the 2012 tax return in the tax filing season of the Spring of 2013, to either start re-contributing or electing out.
If you re-commence contributing, your pre-existing monthly CPP cheque will continue as before. These new contributions to CPP starting in 2012, made by people still working but already collecting CPP benefits under the “old system”, will go into an additional, new Post-Retirement Benefit (PRB) fund. After the first year of contributions under the “new system”, an extra, separate monthly benefit will be paid, as per a formula, which will be in addition to the amount presently received under the old system. Each extra year of such new contributions into the future similarly will result in an increase to the separate benefit paid out commencing in the year following.
To summarize, if you are under age 65, you have no choice and must start contributing again. You will “benefit” by receiving a higher monthly CPP cheque in the future. If you are between age 65-69, you have the option, and should consider the cost/benefit of re-contributing. CRA has created a web reference that gives an estimate of how much your CPP cheque will increase if you re-join.
These changes are irrelevant for those age 70 and over, and those who had not yet started to collect CPP prior to January 1, 2012. For the latter group who are contemplating retirement in the future, the CPP options available to them have changed.
While the Tax Act goes to great pains to stop income splitting between spouses, the CPP system actually allows and encourages it (with the exception of the PRB – see above). A couple, either married or common law, may apply to pool and split equally their CPP entitlements. This can be advantageous where one spouse has both higher overall retirement income and higher CPP entitlement. The sharing effectively moves taxable CPP income to the lower tax bracket partner. There are a few rules, however. First, both partners must be at least age 60 and officially apply, i.e. one cannot continue working, except as noted above. The pooled and shared entitlement includes those years that they were together. CPP entitlement prior to their marriage remains with each of them separately.
Your entitlement is a function of your earnings history since 1966 and your exact age upon application. The entitlement formula permits the following beneficial adjustments:
- Everyone automatically excludes 15% of the lowest income years over their working careers until 2012. This exclusion increases to 16% in 2012 and 17% in 2014.
- Seniors who continue working can exclude low earning periods after age 65 in addition to the above exclusions
- Everyone who collected CPP disability pension can exclude those periods
- Parents with low or no income periods during which they raised children under age 7 may opt to have those years excluded
CPP Disability Pension
Working Canadians who suffer from a severe physical or mental impairment prior to age 65 may apply for disability pension. Medical evidence and a medical examination may be required, and re-established from time-to-time. The disability pension stops at age 65, at which time the regular retirement CPP pension automatically would commence. A disability recipient cannot opt for early retirement CPP prior to age 65. Children under age 18 (or 25, if still in school) may also apply for a pension in this circumstance.
Your estate may apply for a small lump-sum death benefit equal to the lesser of six times your monthly benefit, or $2,500. The payment is paid and taxable to either the surviving spouse or the Estate. To qualify, the deceased must have contributed for either:
- At least 1/3rd of the total number of years within his or her contributory period and had earnings above the basic exemption amount, and in no case for less than 3 years, or
- At least 10 years
Survivor’s CPP pension
The surviving spouse may be entitled to a survivor’s CPP pension. The amount of the benefit depends upon the survivor’s age and one’s own CPP entitlement. The combination of survivor’s entitlement plus one’s own entitlement cannot exceed certain maximums. This pension does not cease upon remarriage. The survivor will receive extra amounts for children under age 18, or under age 25 if the children are still in full-time schooling. The children will receive these amounts directly if there is no surviving parent.
CPP and Divorce
CPP credits earned by both parties during a marriage can be pooled and divided equally upon separation or divorce. The government needs to be informed of the separation and the period of the relationship.
Statement of Contributions
You can request a statement of your entire CPP contribution history, as well as an estimate of your ultimate entitlement based upon contributions-to-date. Write to: Contributor Client Services, CPP, PO Box 9750, Postal Station T, Ottawa Ontario K1G 4A6.
Tax and Financial Planning Issues
- Be sure to apply for any entitlements pertaining to death situations
- Strategically decide what is best for you in terms of application between ages 60 and 70
- Delaying your application through late low or no income years actually may be worsening your entitlement
- Strategically decide when and whether to split your entitlements with your spouse
- Strategically decide whether the late premium or early discount works in your favour
- Remember CPP issues re divorce or disability
- If you are an immigrant to Canada or worked in another country, Canada may have a social security agreement with that country which may give you some transfer credits.
A Sample of Current CPP Amounts (2011)
There are no plans to increase the contribution rate beyond the current amount of 4.95% each for the employee and employer (9.9% for the self-employed). The Maximum Pensionable Earnings amount ($54,900 in 2016) will continue to be indexed annually.