When contributing to the Canada pension plan, we do so with the understanding that this will ensure our financial security when we retire. While the concept is fairly simple, there are still a lot of things most people don’t know about this plan. A proper understanding ensures that you get the most out of your plan and that you make the best financial decisions. So, here’s what you need to know.
The Canada Pension Plan (or CPP) is a retirement plan for those who have worked in the country through employment or self-employment. It is mandatory to participate. It started back in 1966 and your contributions and eligibility are tracked by the government. Your maximum pensionable earnings (YMPE) areset each year. Your premiums and pension are then determined by this figure and your earnings. Prior to the mid 80s, CPP payments started at age 65 for everyone. The system has changed since then to offer greater flexibility. Today we have the choice of when to begin collecting CPP (before or after age 65). If you apply before 65, you receive a discount and, if you apply after 65, you receive a premium.
The amount you receive when you apply is the amount that you will receive until death. This is subject to inflation adjustments. If you are over 65 and under the age of 70, you can apply for retroactive CPP payments. They can apply to one month after your 65th birthday or up to 12 months – whichever is less.
If you are over 65, under 70, and collecting CPP while continuing to work, you are allowed to file an election to stop contributing to CPP. This is beneficial since paying in to the CPP at this point will not improve your benefits enough to make continued payments worth your while.
Manditory contributions for 60 – 65
For those between the ages of 60 and 65, contributions to the CPP are mandatory. This applies to employed and self-employed workers alike. Self-employed workers need to make both employer and employee contributions.
Not mandatory contributions 65 – 69
For those in this age category, re-contributing is optional. The default is to opt-in which means that, if you want to opt out, you need to complete the appropriate form. This application comes into effect the month ater the form is received by the appropriate authorities. If the employee wishes to continue making payments, the employer is obligated to continue making payments too. Re-contributing is optional for self-employed people too.
Income splitting between spouses is usually discouraged but this is not the case when it comes to the CPP system. Spouses (married or common law) can apply to pool or split equally their CPP entitlements. This can be beneficial since it moves the taxable CPP to a lower tax bracket. In order to apply for this, both partners must be at least 60 years of age. An official application needs to be submitted. The pooled entitlement must include the years spent together and, apart from stated above, continued working is not possible. Any CPP entitlement prior to marriage remains with each partner separately.
About opt-out Years
Your entitlement applies to earnings since 1966 and the formula used to calculate how much you will receive each month depends on this earning history and your age upon application. It’s common to exclude 15% of your lowest income years until 2012. For seniors, low earnings after the age of 65 can be excluded along with the exclusion previously mentioned. If CPP disability pension was claimed, this period will also be excluded. Parents with no or low income during periods which they raised their children under the age of 7 can have these years excluded.
CPP Disability Pension
Canadian workers who suffer from a severe mental or physical impairment before the age of 65 can apply for a disability pension. Medical examination and evidence is often required and may require follow ups over time. This disability pension ends at the age of 65. The regular CPP will then automatically come into effect. Disability recipients may not opt for early retirement before age 65. Children under 18 or under 25 if still in school, can apply for a pension in such circumstances.
Your estate can apply for a small death benefit equal to the lesser of 6 times your monthly benefit (or $2,500). This amount is paid and taxable to the surviving spouse or the estate. In order to qualify, the deceased must have contributed for at least one third of the total number of years in their contributory period AND received earnings above the basic exemption amount. In no case for less than 3 years. Alternatively, the deceased must have contributted for at least 10 years.
As the surviving spouse, you could be entitled to your deceased spouse’s CPP pension. The amount you will receive depends on the age of the survivor and the CPP entitlement. The combination of the two amounts may not exceed certain set maximums. This pension does not cease should the remaing spouse remarry. The survivor will also receive additional amounts for any children under 18 or under 25 if still in school. Children receive these amounts directly if they do not have any surviving parents.
Divorce and CPP
If the couple has opted for pooled CPP, the amount will then be divided equally upon divorce or separation. The government must be informed regarding the separation as well as the duration of the relationship.
- While the Canada Pension Plan might seem more complex than it was years ago, it also offers many great benefits. If you are curious about your current contribution, remember that you can also send a request for a statement of contributions. For more information or assistance, contact Tax Benefits Canada at +1 (855) 413-6971.