Canada Pension Plan (CPP)
One of the very fortunate aspects of living in Canada is that all people 65 years or older
will get a pension from the Government of Canada. The Canada pension plan (CPP) and
its Quebec counterpart the QPP are financed by contributions by both the individual and
their employers over their work life. If your parent was self-employed, then they made
contributions through their annual personal tax return filings. Your parents’ pension
amount depends on how much they have contributed over their working lives. It can be
as low as $1 To a maximum of $751.67 per month. This taxable monthly payment is set
for the rest of your parents’ lives and are indexed for inflation.
Interestingly, the government has allowed individuals to collect CPP as early as age 60 if
they are retired. The monthly amount they will receive for the rest of their lives will be
less then if they had waited until 65 to start collecting. The government reduces the “age
65” amount by ½ percent for every month short of 65 your begin to collect. Conversely,
your parents do not have to collect until age 70 if they desire. They may have no intention
of retiring until then. If this is the case, the government will increase the monthly
lifetime amount by ½ percent for every month exceeding the “age 65” amount. Of
course, some people decide to retire at 60, begin to collect their CPP, and then find
another job. Once you are 65, you are not required to make CPP contributions any
This allows for some interesting planning as illustrated by an experience I had with a
client of mine I’ll call George. George is single with no dependants and is sixty but
looks seventy five. He’ll shoot me for that comment but getting a friendly jab at a buddy
in a book is too good an opportunity to pass up. He was wondering what to do about CPP
after his children raised the subject. He had not yet begun to collect it and was unsure as
to the best option. I explained to him that when to collect the pension depends on his
financial situation and even health. If there is a history of shorter lifespans, say mid 70’s
or less, then he may want to begin collecting sooner then later. If your family has longer
lifespans, then he may consider waiting until 70 to begin collecting. It is a little awkward
talking about someone’s lifespan but it was required here. I explained that some advisors
feel that if he does not need the pension money to live on, it may be best to begin
collecting the lesser amount at 60 and invest the monies. With sound investments, and
this is the risk, he could conceptually have grown his investments to an amount that
allows him to draw income equal to or greater than the amount lost by taking early
pension. If he does not live to age 65, then the investments (created by the early CPP
benefits) will become part of his estate and benefit his heirs. This is much better then
dying before age 65 and getting no CPP benefits thereafter. This option provides much
more money in the long run to his estate. George needed a drink after talking about his
imminent demise so “academically” but I am happy to say he has a family of very longlifers.
He’ll be around for me to take jabs at for quite some time.
The CPP also provides a death benefit, being $2,500 in 1999, to the estate of the deceased
individual. The benefit is six times the monthly benefit being received prior to death or
10% of the “yearly maximum pensionable earnings” YMPE, whichever is less.
There is also a survivors benefit payable to the surviving spouse or dependent. If the
surviving parent is 65 years or more, the benefit is $451 per month. If your surviving
parent is less then 65 years of age, then the benefit is $414.46 per month. Keep in mind
that this benefit will be reduced based on how much current CPP the surviving spouse
has. The government does not want a person collecting more then 1 full pension. As a
result, the total of the deceased parent surviving pension benefit plus the current CPP
being collected by the surviving parent cannot exceed the maximum CPP benefit
available to an individual. As such, if the surviving parent already receives the maximum
CPP benefit they will not receive any survivors benefit.
You can contact Louis Sapi in Toronto or Mississauga for advice on Canada Pension Plans at 905-678-2740
Taxes also play an important role. If your parents are in a higher tax bracket, with good
income, then their benefits will be taxes higher today. If they wait until 70, when most
people’s incomes tend to decline, then the taxes will also decline.The decision on when to
begin collecting requires some analysis and likely some help from a financial planner.
Fortunately, every 3 or 4 years, the government sends each taxpayer a CPP statement of
contributions, which shows you what your benefits would be if you retired today. Check
to see if your parents have kept this statement. It will really help in the planning process.
If you can’t find the forms, then you can call Health and Welfare Canada to get the
One final note on this topic, if your parents are immigrants, they may qualify for a
pension from their country of birth or any country they may have resided in for some
period. You should check with their birth country’s consulate in Canada. As an
example, for my mother, who was born in Italy, I checked with the Italian consulate in
Toronto and was provided with all the information to help my mother obtain her Italian
Old Age Security (OAS)
Canada also provides another benefit called the Old Age Security (OAS). Technically,
the OAS is not a pension since you never had to work to be eligible for it and it is paid
out of general tax revenues unlike the CPP which is specifically funded by contributions
by employees and employers. It is available to people who are 65 years old and have
satisfied certain residency requirements. For instance, if you were born before July 1,
1952, then you can receive the maximum of $417.42 if you were residing in Canada for
the last 10 years. If you were born after July 1, 1952, then you would have to have lived
at least 40 years, after having turned 18 years of age, in Canada prior to applying. Partial
benefits are available if your parents had lived in Canada for at least ten years between
the age of 18 and 65. You should contact your nearest government office of Health and
Welfare Canada, Income Security Programs to help estimate what the pension would be
if you are trying to plan for your parents’ retirement.
If your parents want to leave Canada permanently, and they have been resident for at
least 20 years after the age of 18, they can still receive their full Canadian OAS in their
new country of residence. There may be adjustments to the amount depending on how
long they have lived in Canada. Again, you can check with Health and Welfare Canada.
As of the fall of 1999, the maximum OAS monthly payment is $417.42. Fortunately,
the OAS is tied to the consumer price index allowing for inflation. In fact, the
government adjusts payments up to 4 times per year.
Unlike the CPP, there are no death benefits for OAS. Upon death, the OAS benefits
cease. If there are any cheques received then the government expects them to be
returned. We know government bureaucracy, they often take months to figure out there
has been a change in an individual’s situation. Even when there is a death certificate
There are also benefits for widows and spouses assuming their income, age and residency
requirements are satisfied. Please review appendix ____ for the specific amounts.
Unfortunately, the government introduced another, what I refer to as a, hidden tax that
affects all seniors. This is the “clawback” provision for OAS. If your parent’s individual
incomes exceed $53,215, the OAS will be reduced by the following formula: Take your
parent’s net income and minus $53,215. Then multiply the difference by 15% up to the
full amount of the OAS. For example, if I had an annual income of $75,000 then my
clawback would be calculated as ($75,000-$53,215)*15%. This gives you a clawback of
$3267.75 which would be deducted from my refund or added to my tax payable. This is
part of the progressive tax concept in our country where the rich pay more. In short, the
greater your income, the greater percentage of your income is lost to tax. Although I
agree in principal with this, I personally would like to meet someone earning only
$53,215 who considers themselves high income or rich. There are ways in which to try
and avoid the clawback. You can have your parents split their incomes between
themselves to a point where they are both under the $53,215 income level cutoff. It
would be silly to have one of your parents with income above the cutoff, and therefore
affected by the clawback, and one under.
To obtain the OAS benefit for your parents, contact Health and Welfare Canada. The
government being the government, you should apply at least 6 months before your
parents turn 65.
Private Pension Plans
If you have one of your parents who are close to retirement and will collect a company
pension, it will be important for your parent to know what type of pension they have:
either a defined benefit (your parents know what monthly income they will receive) or a
defined contribution plan (they know what they contribute but not what they will
Defined Benefit plans
The nature of a defined benefit plan is just how it sounds: the pension benefits you
receive are predefined in terms of the retirement pension income your parent will receive.
An example formula would be where an individual will receive a pension based on 70%
of the average income over the last 5 years of his or her employment income. The great
thing about this type of plan is that your parent’s pension is protected to a large degree
because the employer is legally obligated to pay the pension. If the investments in the
pension plan itself reduced in value, either through bad market conditions and/or
mismanagement, the employer is still legally responsible to make up the difference and
maintain the pension income to the retired employee. This seems fair since the
employee has no say in how the pension assets are invested. This is purely up to the
employer. Most Canadians belong to a defined benefit pension plan.
Defined Contribution Pension plans
Unlike the defined benefit plan above, the define contribution plan defines how much can
the employer and employee contribute annually to the employee’s pension plan.. It is
typically based on a % ( typically around 5%) of the employees earnings. The taxman
limits the total combined amount contributed to $13,500 annually. The contributions are
invested by fund managers and hopefully grow in value. At retirement, the employee can
roll the total pension into a locked-in RRSP or purchase an annuity to fund a pension.
Again, unlike a defined benefit plan, here the employee takes all the risk. The
employer’s legal obligations are only the annual contributions each year. The
employee’s ultimate retirement pension depends on how well the investments faired. If
there was a better then expected return on investments, the employee’s pension increases.
Unfortunately, the opposite is true as well. If the investment performance was poorer
then hoped and expected, then the employee’s retirement pension is reduced. Employees
typically have a say as to the type of investments the fund manager will invest in. Overall,
even though this type of plan has produced spectacular results in the last few years
booming equity markets, it is not the most popular plan due to the difficulty in projecting
the ultimate pension.
You can contact Louis Sapi in Toronto or Mississauga for advice on Canada Pension Plans at 905-678-2740