Canada Pension Plan

Agdex#:	051/800
Publication Date:	June 2006
Order#:	06-065
Last Reviewed:	August 2008
History:	(Replaces OMAFRA Factsheet Canada Pension Plan, Order No. 01-029)
Written by:	Gary Mawhiney - Human Resources Program Lead/OMAFRA

Table of Contents

• Introduction
• Objectives of this Factsheet
• How CPP Works
• Changes to CPP
• Fuller Funding
• What Remains The Same
• Contributory Period
• Retirement Pension
• Table 1.   Contribution Rates
• Survivor Benefits
• Disability Pension
• Credit Splitting
• Common Law Relationships
• Other Resources
• Table 2 (a).    Benefit Calculations
• Table 2 (b).    Benefit Calculations
• Related Links

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Introduction

Financial security is a very important consideration for retiring farmers. Pension benefits from the Canada Pension Plan (CPP) provide retirement income. The CPP also pays benefits when a contributor becomes disabled or to the family in the case of a deceased contributor. However, farmers and other self employed individuals sometimes encounter difficulties in understanding the Canada Pension Plan and the calculation of benefits from it.

Objectives of this Factsheet

The objectives of this Factsheet are to:

• indicate the financial benefits possible through maximum contributions to the Canada Pension Plan
• indicate the required contributions necessary to achieve maximum benefits from the Canada Pension Plan
• provide an understanding of Canada Pension Plan benefits

How CPP Works

The Canada Pension Plan is a contributory plan, funded entirely by the contributions from employees, employers and self-employed persons. Additional funding is obtained by the investments of the Canada Pension Plan Investment Fund.

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One month after reaching age 18, participation in the plan is achieved through compulsory contributions on earnings from employment or self-employment. Contributions are made on earnings from salary or wages received as an employee or net earnings from self-employment as defined by the Income Tax Act.

Contributions are made on annual earnings above a minimum called the Year's Basic Exemption, to a maximum called the Year's Maximum Pensionable Earnings. The Basic Exemption and the Maximum Pensionable Earnings change over time. For 2006, the Maximum Pensionable Earnings are $42,100 and the Basic Exemption is $3,500. In dollar terms, employees and their employers each contribute a maximum of $1,910.70 on average earnings in 2006. CPP benefits include:

• retirement income
• disability benefits
• a lump sum death benefit
• benefits for children of disabled and/or deceased contributors
• benefits for the surviving spouse/common-law partner of a deceased contributor

Changes to CPP

Changes were implemented to the Canada Pension Plan in 1998 to ensure that the CPP is affordable to future generations and can be sustained in the face of an aging population, increasing longevity, and the retirement of the baby boom generation.

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Fuller Funding

• The CPP is moving from pay-as-you-go financing, to fuller funding designed to build a larger reserve fund. It is expected to grow in value from about two years of benefits currently to about four to five years of benefits.
  
  
• Contribution rates have risen over the last four years. Employees and employers each contribute half of the total contributions. Self-employed people pay both portions. The contribution rate will not rise above 9.9% of contributory earnings.
  
  
• The year's basic exemption - the first $3,500 of earnings on which no contributions are paid - will be maintained and frozen.

The contribution rates for 1987 to 2030 are shown in Table 1, Contribution Rates. The original contribution rates are listed under the heading of previous rates while the new contribution rates are listed as the adjusted rates in Table 1.

What Remains The Same

• All benefits under the CPP will remain fully indexed to inflation.
  
  
• The ages of retirement - early, normal or late - remain unchanged.

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Contributory Period

The length of time an individual makes contributions to the plan is called the contributory period. The contributory period starts on January 1, 1966 or 1 month after the individual reaches 18 years of age and will continue until the individual terminates contributions because of death, the month before retirement starts, or automatically at age 70.

Since the beginning of the plan, a record of yearly pensionable earnings and contributions is maintained and updated regularly using information supplied by Canada Revenue Agency (formerly called Canada Customs and Revenue Agency). Each contributor is sent an updated statement of pensionable earnings and contributions on an annual basis. You may also apply for a statement once every 12 months. To do this, complete an Application for Statement of Earnings, which is available from the nearest Service Canada office. The application may only be submitted and signed by the contributor or his or her legal representative.

Retirement Pension

An individual is eligible to receive a monthly pension if he or she has been credited with contributions to the Plan in at least 1 year, and has either reached 65 years of age or is between 60 and 64 and has wholly or substantially ceased working. If you choose to receive retirement pension between age 60 and 64, the amount of pension will be reduced by 0.5% for each month that you are under age 65. The maximum reduction is 30%at age 60. If you delay receiving your pension until you are between 65 and 70 years of age, the amount of your pension will increase by 0.5% for each month you are over 65 to a maximum of 30% at age 70.

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Table 1.    Contribution Rates

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The monthly pension received varies between individuals. To ensure that the value of the pension is kept up-to-date yearly, pensionable earnings are indexed to reflect the growth in average wages to the present. Average wages for 1966 ($5,000) is indexed to equal in value average wages of 1986 ($25,800). To protect pension against the years when earnings were low the following periods could be excluded when pension is calculated:

• low earning periods spent rearing children under age seven
  
• low earning months after age 65
• 15% of your remaining contributory period when your earnings were the lowest

Once the low earning periods have been removed, average adjusted earnings are calculated. Twenty-five per cent of the average adjusted earnings are available for retirement pension at age 65.

Example: Jim has made maximum contributions to the Canada Pension Plan since the Plan began in 1966. He retired in January 1999. His retirement benefits can be calculated from Table 2, Benefit Calculations, Column 4 to be $751.67.

Survivor Benefits

A survivor's pension is a benefit that is payable to the estate, the surviving spouse/common-law partner and the dependent children of the deceased Canada Pension Plan contributor. There are three types of survivor pensions:

• a monthly pension for surviving spouse/common-law partner
• a monthly benefit for the dependent children of deceased contributors
• a lump sum benefit payable to or on behalf of the estate of the deceased contributor

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To qualify for survivor benefits, a contributor must have made contributions in at least three years. If your "contributory period" is longer than nine years you must have contributed in one-third of the calendar years in your contributory period or 10 calendar years, whichever is the lesser time period. The "contributory period" is the total span of time during your life when you may contribute to the Canada Pension Plan.

The amount of the surviving spouse's/common-law partner's pension is related to the amount of the contributor's retirement pension. When the surviving spouse is 65 years or over, the benefit available will equal 60% of the retirement pension. When the surviving spouse is between 45 and 65 years of age, the benefit will be a flat rate portion, plus 37.5% of the retirement benefit.

Example: Jim began drawing maximum retirement benefits in January 1999. In July, Jim died. Jim's wife, Marjorie, who is 66, can calculate her maximum survivor benefits from Table 2, Column 6 to be $414.46 per month. The maximum death benefit payable to Jim's estate would be calculated from Table 2, Column 5, to be $2,500.

Disability Pension

The CPP is intended to help replace the income of persons in the labour force who became severely disabled and can no longer earn a living.

There are two types of disability pensions:

• a monthly benefit payable to the disabled contributor
• a monthly benefit for the dependent children of the disabled contributor

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Individuals are eligible for a disability benefit if they are considered to be disabled according to the Canada Pension Plan. Effective March 3, 2008, an amendment to the existing CPP legislation allows individuals with twenty five years of valid contributions to meet the contributory requirement for CPP Disability with valid earnings in the three of the last six years. This contribution must be on earnings that are at least 10% of the year's maximum pensionable earnings. You must be under 65 years of age and have not been in receipt of a Canada Pension Plan retirement pension for longer than six months, unless disability occurred prior to the 6th month. There are also provisions for late applicants.

For those receiving disability benefits at the time of retirement at age 65, instead of calculating the retirement pension based on the year's maximum pensionable earnings, the calculation is based on the year's maximum pensionable earnings at the time of disablement and indexed to age 65.

Refer to Table 2, Column 9 for Disability Pension calculations.

Credit Splitting

Canada Pension credits are based on contributions that each worker makes to the plan. These credits are built up over years and are used to determine the amount of future Canada Pension Plan benefits.

The Canada Pension Plan recognizes that both spouses earn Canada Pension Plan credits equally during the time they live together, even if one of the spouses was not in the paid labour force. The plan allows for the equal splitting of these credits in the event of divorce or separation of legal spouses, or separation of parties of common-law relationships.

Credit splitting takes place if the spouses/common-law partners lived together for at least 12 consecutive months and the marriage ended in divorce or annulment. The period of separation must be at least 12 consecutive months and an application must be received from either spouse in order to indicate credit splitting.

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Common Law Relationships

Spouse is defined as the person who is legally married to the contributor. A common-law partner is the person who was living with the contributor and who had been living in a marriage-like relationship for at least 12 months. This includes same-sex partners.

Example: Judy and Pat divorced after being married for 20 years. During the marriage, Judy was not in the paid labour force, and therefore did not contribute to the Canada Pension Plan.

Upon their divorce, Judy applied to have the credits Pat earned during the course of the marriage divided equally. After the division, Judy would receive an equal amount of the credits. When Judy reaches retirement age, these credits will provide her with a retirement. If she becomes disabled, she may qualify for a disability benefit.

The period of separation must be at least 12 consecutive months. An application must be made within four years of the date of separation in order to initiate credit splitting.

Other Resources

This Factsheet is intended to serve as a guide to the Canada Pension Plan and not as expert advice. Additional information may be obtained by contacting Service Canada Income Security Programs or your financial advisor. For the website link refer to www.servicecanada.gc.ca/ and telephone number are as follows:

1-800-277-9914 (English)
www.sdc.gc.ca/en/gateways/nav/top_nav/program/isp.shtml

1-800-277-9915 (French)
www.rhdsc.gc.ca/fr/passerelles/nav/nav_haut/programme/psr.shtml

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Income Security Programs

Additional information is also available on the Service Canada website refer to the related links.

Table 2 (a).    Benefit Calculations

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Table 2 (b).    Benefit Calculations  

The maximum self-employed contribution is twice the amount shown for the employee-employer contribution.

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