Canada Pension Plan

While it is always a good idea to have some retirement savings set aside, the Canadian government has programs available that can supplement your retirement income.  There are two main federal government retirement programs:  the Canada Pension Plan, and Old Age Security.  When planning for retirement, there is some discretion as to when to start receiving benefits, therefore it is important to consider them in your fiscal plan.  In this tax tip we will focus on the Canada Pension Plan.

Canada Pension Plan (CPP)

CPP is available, in varying degrees, to individuals who have earned pensionable income through their employment, or have reported self-employment income in Canada during their pre-retirement lifetime.  Your benefit under CPP is calculated by looking at all of the years from age 18 until your retirement, and the contributions made to CPP during those years.  This calculation excludes up to 8 “low-contribution” years, where you made lower or no CPP contributions.  In addition, the calculation can exclude certain years where you stayed home to raise children where your CPP contributions were impacted.

Generally, the base pension age contemplated for CPP is 65.  At age 65, your maximum monthly benefit based on 2016 rates would be $1,092.50.  This maximum amount may be supplemented by additional amounts for disabled recipients, surviving spouses of CPP contributors or through contributions to CPP after starting to receive CPP benefits.  Although the base age is 65, you can apply to start receiving CPP as early as age 60, or defer receiving it to as late as age 70.  Early or late application to CPP impacts your benefit as follows:

  • For each month prior to age 65 that you receive CPP, your benefit is reduced by 0.60%; or
  • For each month after age 65 that you defer CPP, your benefit is increased by 0.70%.

Therefore an individual starting to receive CPP at age 60 will receive 36% less in monthly benefits than if they started at age 65.  On the flip side, an individual who starts receiving their CPP at age 70 will receive 42% more than of a monthly benefit than if they started receiving it at age 65.

As depicted above, the “break-even” points for receiving CPP early or late relative to the base age are as follows:

  • For an individual who starts receiving reduced benefits at 60, they would have received the same amount of benefits by approximately age 73 if they had taken the “base” CPP at 65; and
  • For an individual who defers receiving enhanced benefits at 70, they would have received the same amount of benefits by approximately age 81 if they had taken the “base” CPP at 65;

The above does not factor in the time-value of money (“a dollar today is worth more than a dollar tomorrow”) or the tax rate applicable to the income.  When calculating the break-even point using a present value formula, the above “break-even” ages would be pushed further back.

Depending on your cash flow needs the option to defer (or receive early) your CPP may be an important consideration in your retirement planning.  If you’re in the process of planning for retirement and have questions in relation to your CPP, contact us!