Canada Pension Plan


Factsheet - ISSN 1198-712X   -   Copyright Queen's Printer for Ontario
Agdex#: 051/800
Publication Date: July 2015
Order#: 15-029
Last Reviewed: July 2015
History: replaces OMAFRA Factsheet 10-075 of the same name
Written by: OMAFRA Business Management Staff

This Factsheet is intended to serve as a guide to the Canada Pension Plan and not as expert advice. Contact your financial advisor or Service Canada Income Security Programs for additional information.

1-800-277-9914 (English)
1-800-277-9915 (French)

www.servicecanada.gc.ca

Table of Contents

Introduction

Financial security is a very important consideration for retiring farmers. Pension benefits from the Canada Pension Plan (CPP) provide retirement income, and the CPP pays benefits when a contributor becomes disabled or to the family of a deceased contributor.

The objectives of this Factsheet are to:

  • provide an understanding of Canada Pension Plan benefits
  • help the reader understand how the Canada Pension Plan calculates the benefits for farmers and other self-employed individuals
  • explain the financial benefits possible through maximum contributions to the Canada Pension Plan
  • show the contributions necessary to achieve maximum benefits from the Canada Pension Plan

How CPP Works

The Canada Pension Plan has been operating since 1966 and is designed to protect families against income loss due to retirement, disability or death.

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.

One month after turning 18, Canadians begin to participate in the plan through compulsory contributions on earnings from employment or self-employment - from salary or wages received as an employee or from net earnings from self-employment, as defined by the Income Tax Act.

The amount of the contribution is based on annual earnings above a minimum (the year's Basic Exemption) to a maximum (the year's Maximum Pensionable Earnings). The amounts of the Basic Exemption and the Maximum Pensionable Earnings change over time. For 2013, the Maximum Pensionable Earnings were $51,100 and the Basic Exemption was $3,500. In dollar terms, employees and their employers each contributed a maximum of $2,356.20 on average earnings in 2013.

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

Fuller Funding

  • The CPP has moved 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 2 years of benefits currently to about 4-5 years of benefits.
  • 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.

Table 1. Contribution Rates

* Previous Rate indicates the old contribution rates as a percentage of your income to a maximum, while Adjusted Rate is the percentage that is now being used.

NR = no adjusted rate at that time

Year Previous Rate* (%) Adjusted Rate (%)
1987
3.80
NR
1988
4.00
NR
1989
4.20
NR
1990
4.40
NR
1991
4.60
NR
1992
4.80
NR
1993
5.00
NR
1994
5.20
NR
1995
5.40
NR
1996
5.60
NR
1997
5.85
6.00
1998
6.10
6.40
1999
6.35
7.00
2000
6.60
7.80
2001
6.85
8.60
2002
7.10
9.40
2003
7.35
9.90
2004
7.60
9.90
2005
7.85
9.90
2006
8.10
9.90
2007
8.30
9.90
2008
8.50
9.90
2009
8.70
9.90
2010
8.90
9.90
2011
9.10
9.90
2012
9.30
9.90
2013
9.50
9.90
2014
9.70
9.90
2015
9.90
9.90
2016
10.10
9.90
2030
14.20
9.90

The contribution rates for 1987 to 2030 are shown in Table 1.

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 continues 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 the Canada Revenue Agency (CRA). Each contributor is sent an updated statement of pensionable earnings and contributions once a year. You may also apply to receive a statement at any other time. To do this, complete an Application for Statement of Contributions, which is available on the CRA website or through your My Service Canada account.

Retirement Pension

The standard age for beginning to receive your CPP retirement pension is the month after your 65th birthday. However, you can take a reduced pension as early as age 60 or begin receiving an increased pension after age 65.

The amount of your pension will depend on how much and for how long you have contributed to the CPP and on your age when you want your pension to start. If you take it before age 65, your pension will be reduced, by up to 32.4% at age 60. If you take it after age 65, your pension may be larger, by up to 42% at age 70.

There have been recent changes to the early pension reduction and late pension increase to ensure that whether you choose to receive an early or late retirement pension, the amount you receive will reflect your contributions made to the Plan and your average duration of benefits.

Taking Your Pension Before Age 65

From 2012 to 2016, the Government of Canada is gradually changing the early pension reduction from 0.5% to 0.6% for each month you receive it before age 65. This means that by 2016, an individual who starts receiving their CPP retirement pension at the age of 60 will receive 36% less than if they had taken it at 65.

Table 2 shows the percentage by which your retirement pension will decrease for each month that you receive your pension before age 65. These amounts will change every year until 2016.
For example, if you begin receiving your retirement pension in 2013, it will be reduced by 0.54% for each month that you receive your pension before age 65.

Table 2. Pension reduction rates

Year of Retirement % (monthly reduction)
2012
0.52
2013
0.54
2014
0.56
2015
0.58
2016
0.60

Taking Your Pension After Age 65

If you take your pension after age 65, your monthly payment amount will increase by 0.7% for each month that you delay receiving it, up to age 70 (8.4% per year).

This means that, an individual who starts receiving their retirement pension at the age of 70 will receive 42% more than if they had taken it at 65.

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 the pension against the years when earnings were low, the following periods could be excluded when pension is calculated:

  • low-earning periods spent raising children under 7
  • 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. At age 65, 25% of the average adjusted earnings is available for retirement pension.

Allowance for the Survivor

The Allowance for the Survivor is a benefit available to people who have a low income, who are living in Canada and whose spouse or common-law partner is deceased.

You qualify for the Allowance for the Survivor if you meet all of the following conditions:

  • You are aged 60 to 64 (includes the month of your 65th birthday)
  • You are a canadian citizen or a legal resident.
  • You reside in Canada and have resided in Canada for at least 10 years since the age of 18.
  • Your spouse or common-law partner has died, and you have not remarried or entered into a common-law relationship.
  • Your annual income is less than the maximum annual income. The amount of the Allowance for the Survivor you receive depends on your previous year's income. Find out what income and deductions you must report.

For the period from April 1 to June 30, 2013, the maximum Allowance for the Survivor amount you could get was $1,161.01. Consult the Government of Canada website for current Old Age Security benefit. You must contact the Government of Canada if one of the following situations occurs, since it might change the amount of your Allowance for the Survivor payment:

  • You have a lower annual income due to a retirement or a reduction of pension income (in such cases, the CRA can calculate your Allowance by estimating your income for the current year instead of using last year's income).
  • You remarry or enter into a common-law relationship.

Disability Benefit

The CPP is intended to help replace the income of persons in the labour force who become severely disabled and can no longer earn a living. It may also be available to their dependent children.

There are two types of disability pensions:

  • disability benefit: monthly benefit payable to the disabled contributor
  • children's benefit: monthly benefit for the dependent children of the disabled contributor

To qualify for Canada Pension Plan disability benefits, you must have made contributions to the CPP in 4 out of the last 6 years, 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 6 months, unless disability occurred prior to the sixth 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.

Credit Splitting

The CPP contributions you and your spouse or common-law partner made during the time you lived together can be equally divided after a divorce or separation. This is called credit splitting.

Credits can be divided even if one spouse or common-law partner did not make contributions to the CPP.

Credit splitting may help you qualify for benefits and can affect the amount of any current or future benefits under the CPP program for both you and your former spouse or common-law partner.

Eligibility for credit splitting varies depending on when you divorced or separated, and whether you were married or living in a common-law relationship.

A credit split is not permitted:

  • when the total Pensionable Earnings of the spouses, former spouses or former common-law partners, in a year, was not more than twice the Year's Basic Exemption.
  • for the period before one of the spouses, former spouses or former common-law partners reached 18 or after a spouse, former spouse or former common-law partner reached age 70.
  • for the period when one of the spouses, former spouses or former common-law partners was a beneficiary of a retirement pension, under the CPP or Quebec Pension Plan (QPP)
  • for the period when one of the spouses, former spouses or former common-law partners was considered to be disabled for the purpose of the CPP or QPP disability benefit.

Consult the Service Canada website for specific situations and questions:

  • if your marriage ended in divorce or annulment on or after January 1, 1987
  • if your marriage ended in divorce or annulment between January 1, 1978 and December 31, 1986. (If your marriage ended in divorce or annulment before January 1, 1978, you do not qualify for a credit split. The Canada Pension Plan credit split did not exist before January 1, 1978.)
  • if you are still married and your separation occurred on or after January 1, 1987
  • if your common-law union ended on or after January 1, 1987 (Common-law unions were not recognized for the purposes of credit splitting prior to January 1, 1987.)

Either you or your former spouse or common-law partner can request the CPP credit split. A representative (such as a lawyer) can also make the request on your behalf. In the case of a separation, a signature of one of the spouses or common-law partners is required.

This Factsheet was updated by Nick Betts, Business Management Specialist, Guelph, OMAFRA.


For more information:
Toll Free: 1-877-424-1300
E-mail: ag.info.omafra@ontario.ca