Canada Pension Plan
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.
Table of Contents
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:
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:
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
The contribution rates for 1987 to 2030 are shown in Table 1.
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.
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.
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.
Table 2. Pension reduction rates
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:
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.
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:
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:
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:
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.
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:
Consult the Service Canada website for specific situations and questions:
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.
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