UNIT 2

Government Sponsored Retirement Income Programs

• Operation of the Canada Pension Plan
• Survivor and Disability Benefits
• The Old Age Security System
Operation of the Canada Pension Plan
• Describe the eligibility requirements
• Explain how contributions are calculated
• Describe the retirement benefits available, including early and
delayed pension options
• Describe how retirement pensions can be shared between spouses
or common-law partners for income splitting purposes
• Describe how CPP pension credits can be split upon divorce or
separation
 Survivor and Disability Benefits
• Determine the eligibility of survivors after the death of a CPP
contributor
• Calculate and identify the survivor benefits available after the
death of a CPP contributor
• Calculate and identify the benefits available to disabled
contributors and their children
• Identify specific indexing of CPP rates and benefits
 The Old Age Security System
• Describe the eligibility requirements for basic OAS benefits,
Guaranteed Income Supplement (GIS) benefits, and Allowance
benefits.
• Explain the nature of the benefits provided under the OAS, GIS and
Allowance programs.
• Analyze the impact of other income on the amount of benefits
available for clients receiving OAS
• Calculate the clawbacks, if applicable, for clients receiving OAS
• Advise clients on the most appropriate course of action
 Operation of the Canada Pension Plan
• Program Overview
• The Canada Pension Plan (CPP) is federally administered program designed to
provide monthly pensions to qualified:
• Contributors in retirement
• Disabled contributors
• Children of disabled contributors
• To widows widowers
• Orphaned children of deceased contributors
• In addition, Lumpsum death benefit is payable to the deceased contributor’s estate
• The value of the monthly pension payment is based on:
• Past CPP contributions made on pensionable employment earnings.
• The value is affected by the age at which contributor chooses to receive
 CPP vs. QPP
• The CPP applies throughout Canada and administered by federal
government, except in Quebec.
• In Quebec QPP applies and it is sponsored by provincial government.
• Residents of Quebec must contribute to the QPP.
• Residents of the rest of Canada must contribute to CPP.
• In case of change of contribution, earnings records are merged and
recorded under both plans.
• One combined pension will be paid.
 Same sex and opposite-sex common-law
partners
• The CPP Act recognizes same-sex and opposite-sex, common-law
partners as having same rights and obligations as spouses.
• Definition of Common-law partner of taxpayer at any time
• is a person who cohabits with the taxpayer in a conjugal relationship and who
has either so cohabited for at least one year or
• Who is the parent of the taxpayer's child.
• Widow
• A window includes a widower
• Is a person whose spouse or common-law partner died and who has not
thereafter become the spouse or common-law partner of another person
 Basic Eligibility - CPP
• CPP is a social insurance program
• It is administered by government but the recipients of the benefits must
contribute a portion or all of the costs of the program through premiums.
• Until reforms introduced in 1977, the CPP was primarily a pay as you go program
• Premiums being paid by current employees and employers were being used fund the
benefits of current retirees.
• Eligibility:
• Everyone who has worked and has contributed to the CPP program through
employer/employee premiums on their pensionable employment income is eligible to
receive CPP benefits.
• Pensionable employment earnings includes any employment in Canada that in not
specifically exempt under the CPP.
 Applying for CPP Benefits
• Individuals must complete an application form and submit to Service
Canada.
• Service Canada delivers CPP program on behalf of Human Resources
and Social Development Canada (HRDC).
• Recommended that the application should be submitted at least six
months in advance.
 Exempt Workers
• Services some workers provided are not considered pensionable employment
for purposes of the CPP.
• Exempt workers include:
• Those who do not earn more than the specified ‘exempt amount’ (currently $3500)
• Migratory workers who do not work at least 25 days a year, and who do not earn at
least $250 a year from the same employer.
• Casual employment if it is for a purpose other than your usual trade or business.
• Members of religious orders whose entire earned income is turned over to the order.
• Employment by a government body as an election worker if the worker is not a regular
employee of the government body and works for less than 35 hours in a calendar year.
 CPP Contributory Period
• All individuals over the age of 18 who work in Canada (but outside of Quebec) who
earn more than $3500 are required by law to pay CPP premiums on their pensionable
employment income.
• Employee pays 50% of the required contribution and employer matches that amount.
• Contributory period commences on the later of:
• January 1, 1966 and
• His or her 18th birthday

• Contributory period ends the earlier of:

• The individual begins receiving a retirement pension (age 60 is earliest age)
• When individual reaches age 70
• When the individual dies
 Changes to the CPP Contributory Period
• Previously, contributions are not required once an individual began
receiving CPP retirement benefits.
• January 1, 2012, working beneficiaries under age 65 required to
contribute CPP premiums to age 65 and employer should match the
amount.
• Additional contributions will result in increase in the individual’s
retirement pension by way of a post retirement benefit.
• Between age 65 and age 70 contribution can be made on working
beneficiary’s discretion.
 Contributory Earnings
• contributions are calculated as a specified percentage of contributory
earnings.
• Contributory Earnings:
• Pensionable employment earnings above a basic exemption level up to the
maximum pensionable earnings.
• Formula: the lessor of:
• (The lessor of Pensionable employment earning and YMPE) – YBE
• YMPE is adjusted annually to reflect changes in the average wages and salaries.
• YMPE: The yearly maximum pensionable earnings(2019: $57,400)
• YBE: Yearly Basic Exemption (YBE: $3500)
 Contributory Earnings Example
• Example 1: Jake will earn $29,000 this year. What are his contributory
earnings?
• Jake’s contributory earnings: (the lesser of pensionable employment
earnings and the YMPE) – YBE = [(the lesser of $29,000 and $57,400) -
$3,500] = 25,500
• Example 2:Jasmine earns $67,000. What are her contributory
earnings?
• Jasmine’s Contributory earnings: [(the lesser of $67,000 and $57,400)
- $3,500] = $53,900
 Contribution Rates
• Both employees and their employers must make CPP
contributions based on a specified percentage of the
employee's contributory earnings
• A self-employed person must contribute both the employer
and employee shares
• Contribution rates:
• Employee: 5.10%
• Employer: 5.10%
• Self employed individual: 10.20%
 CPP contribution - Example
• This year Mary has income of $ 56,000.
• Required:
• How much is her CPP contribution Assuming that She is employed.
• How much is her employers CPP contribution?
• How much is her CPP contribution assuming that she is self
employed?
 CPP contribution - Example
• Mary’s CPP contribution assuming that she is employed:
• [(the lesser of pensionable employment earnings and the YMPE) -
YBE] X 5.10% =
[(the lesser of $56000 and $57,400) - $3,500]X5.10% = $2677.50
Her Employer’s CPP contribution for her: $2677.50
Mary’s CPP contribution as self employee = $2677.50
[(the lesser of pensionable employment earnings and the YMPE) - YBE]
X 9.90% = [(the lesser of $56000 and $57,400) - $3,500] X 10.20% =
$5355
 CPP contribution - Example
• Greg income for the current year is $70,000.
• Require:
• How much is hirs CPP contribution Assuming that She is employed?
• How much is his employers CPP contribution?
• How much is his CPP contribution assuming that she is self employed?
 CPP Contribution Example - Solution
• Greg’s CPP contribution assuming that he is employed:
• [(the lesser of pensionable employment earnings and the YMPE) -
YBE] X 4.95% =
[(the lesser of $70000 and $57,400) - $3,500]X5.10% = $2748.90
His Employer’s CPP contribution: $2748.90
Greg’s CPP contribution as a self employee =
[(the lesser of pensionable employment earnings and the YMPE) - YBE]
X 10.20% = [(the lesser of $70,000 and $57,400) - $3,500] X 10.20% =
$5497.80
 CPP Retirement Benefits
• Eligibility: To be eligible for a retirement pension under CPP, an
individual must have:
• Made at least one valid contribution to the CPP
• Reached the minimum age of 60
• Wholly substantially ceased working, if under 65 years of age
• Effective 2012, individuals under age 65 are no longer required to
meet the definition of wholly or substantially ceased working in order
to be eligible to receive CPP retirement benefits.
 Post Retirement Benefits
• Effective 2012, working beneficiary must continue contributions to
CPP until he or she reaches 65.
• Employer must make a matching contribution.
• Between age 65 and 70 contributions are made on beneficiary’s
discretion.
• Employer must match the amount if the if working beneficiary elects
to make contributions.
• Additional contributions will provide post retirement benefits to the
individuals
 Post Retirement Benefits
• The additional contributions will only build PRB.
• They will not create eligibility for the other CPP benefits.
• They will not be included in the calculation of credit splitting or
pension sharing.
 Retirement at Age 65
• The standard retirement age under the CPP program is 65.
• Yearly retirement benefit at age 65 is 25% of his or her average
pensionable earnings adjusted for inflation.
• For 2019, the maximum monthly CPP retirement benefit is $1,154.58.
• The benefit is fully indexed for changes in the consumer Price Index.
 CPP Benefit – Inflation adjustment
example
• Fred had pensionable earnings of $4700 in 1972 when YMPE was
$5,500. He will begin collecting his CPP retirement benefit in 2019
during which time he will turn 65 years of age.
• YMPES for the previous 5 years are: $52,500, $53,600, $54,900,
$55,300, 55,900
• What is his inflation adjusted pensionable earnings for 1972
 CPP Benefit – Inflation adjustment
example
• His inflation adjusted pensionable earnings for 1972:
• Average of the YMPEs for previous 5 years X (pensionable earnings in
the year/YMPE for the year being adjusted)
• (($52,500, $53,600, $54,900, $55,300, 55,900)/5) X (4700/5500) =
$46,521
 General Low Earnings Drop-out
• Provision allows 17% of the years in which an individual had no
earnings or low earnings to be dropped from the calculation of her
average career earnings.
 Retirement Before Age 65
• A contributor can choose to start receiving his or her CPP pension at
age 60.
• opting to start the pension early, a senior receive a reduced benefit.
• The reduced pension remains fixed for the life of the senior other
than annual adjustments for inflation.
Retirement Before Age 65
Percentage Reduction for Early Take-up

Year Monthly Reduction

Prior to 2012 0.50%
2012 0.52%
2013 0.54%
2014 0.56%
2015 0.58%
2016 0.60%
 Retirement Before Age 65 - Example
• In 2020, John, who is 62 years of age elected to apply for his CPP
retirement benefits. by what percentage will his basic benefit
decrease relative to John collecting his pension at the standard age ?
• (((65 - 62) x 12) x 0.60%) = 21.6%
 Retirement After Age 65
• The pensioner also has the right to delay the commencement of
benefits beyond the standard age.
• Opting to delay the commencement of pension will result in increased
benefit.
• The increased pension fully indexed for inflation will be paid for the
remainder of the pensioner’s life.
• There is no additional increase if he or she does not choose to begin
receiving benefits at age 70.
Retirement After Age 65
• Percentage Increase for Late Take-up

Year Monthly Reduction

Prior to 2011 0.50%
2011 0.57%
2012 0.64%
20113 0.70%
 Retirement After Age 65
• Richa, who is 64 years of age, enjoys working and sees no reason to
retire prior to age 70. If she does in fact defer collecting her CPP
retirement benefits until age 70, by what percentage will her basic
benefit increase relative to Richa collecting her pension at the
standard age (disregard the possibility of a post-retirement CPP
benefit)
 Retirement After Age 65
• (((70 - 65) x 12) x 0.70%) = 42%
Assignment or Sharing of Retirement
Pensions
• spouses and common-law partners can choose to share or assign
their CPP retirement pensions
• this can reduce their total income taxes by shifting some of the
income from the person in the higher tax bracket to the person in the
lower tax bracket
• with assignment, each person receives a portion of the other
person’s retirement pension
• the portion is based on the length of time they have lived together, in
relation to their total contributory period
 Assignment or Sharing of Retirement
Pensions
• to assign CPP retirement benefits, spouses or
• common-law partners must:
• be 60 years of age or older
• be together (i.e. not divorced)
• formally apply for assignment
• if the spouses or common-law partners choose to assign their
pensions, both pensions must be shared; not just the pension of the
person with the higher income
 Assignment of Retirement Pensions
Example
• Kristopher and Ingrid have been married for 15 years. Coincidentally,
both individuals have been working for 20 years and therefore, have
the same number of years of contribution to the CPP. Kristopher is
entitled to a CPP pension of $600 per month, while Ingrid is entitled
to $300 per month.
 Assignment of Retirement Pensions
Example
• Assignment ratio: Years of marriage or cohabitation ÷ Years of
contribution = 15 ÷ 20 = 75%
• Kristopher's monthly CPP pension that can be assigned for splitting: s
(CPP × assignment ratio) = ($600 x 75%) = $450
• Kristopher's monthly CPP pension that can not be assigned for splitting:
CPP - assignable CPP = 600 -450 = $150
• Ingrid's monthly CPP pension that can be assigned for splitting: s (CPP ×
assignment ratio) = ($300 x 75%) = $225
• Kristopher's monthly CPP pension that can not be assigned for splitting:
CPP - assignable CPP = 300 – 225 = $75
 Assignment of Retirement Pensions
Example
• Total assignable CPP = Kristopher's assignable CPP + Ingrid's
assignable CPP = $450 + $225 = $675
• Assigned portion paid to each spouse = 675/2 = $337.50
• Kristopher's monthly pension after assignment = Kristopher's non-
assignable portion + Kristopher's assigned portion = $150.00 +
$337.50 = $487.50
• Ingrid's monthly pension after assignment = Ingrid's non-assignable
portion + Ingrid's assigned portion = 75 + 337.50 = $412.50
 CPP Credit Splitting Upon Divorce or
Separation
• Contributions made over the years by a taxpayer to the CPP become known as
CPP pension credits
• When a relationship ends, the CPP pension credits which the couple built up
during the time they lived together can be divided equally between them
• This division is called credit splitting
• Credits can be split even if one spouse or common-law partner did not pay
into the CPP
• Credit splitting is mandatory upon divorce or annulment of a marriage in most
provinces
 Survivor and Disability Benefits
• CPP survivor’s benefits include: the death benefit, the survivor’s
pension and the orphan’s benefit
• To receive survivor’s benefits, the contributor must have made
contributions for the minimum qualifying period
• Calculated as:
• lessor of:
• at least 1/3 of the total number of years included within his or her
contributory period but in no case for less than 3 years or
• at least 10 years
 Death Benefit
• The lump sum death benefit is meant to help the family of a deceased
contributor with funeral expenses however, the benefit can be used for any
purpose
• The death benefit is the lesser of:
• 6 x monthly CPP retirement pension of deceased and
• a maximum of $2,500
• According to legislation, it is payable to the estate of the deceased; in
practice, it is often paid directly to the surviving spouse or common-law
partner
 Survivor’s Pension
• The survivor of a deceased contributor who meets the minimum
eligibility qualifications may be eligible for a survivor's pension
• The value of the pension and the timing of payments depend on
the survivor’s age, personal CPP retirement or disability pensions
and dependents
• A survivor's pension is not terminated upon remarriage or
entering a new common-law relationship
 Orphan’s Benefit
•an orphan of a deceased contributor may receive a monthly orphan’s benefit up to 18
years of age and up to 25 years of age if he or she is enrolled full- time in an approved
educational institution
• orphan’s benefits are suspended if the child reaches age 18 and is not in school full-
time; benefits may be reinstated if the child returns to school full-time
• marriage does not affect the orphan’s benefit provided all other eligibility
requirements are met
• CPP and QPP orphan's pension is a flat monthly rate, indexed annually by the
Consumer Price Index
 Disability Benefits
• Disabled contributors may be eligible to receive a disability pension
• Their children may also be eligible to receive a disabled contributor’s
child’s pension
• Under the CPP, a person is considered to be disabled only if he or she
suffers from a severe and prolonged medical impairment of a physical
or mental nature
• since 1998, disability benefits are payable only if the contributor has
made contributions for at least 4 of the last 6 calendar years
 Disability Benefits
• the monthly disability pension consists of a flat rate component + 75%
of the contributor's retirement pension, to a combined yearly
maximum
• the maximum disability benefit is greater than the maximum
retirement benefit
• at age 65, the disability pension is automatically converted to a
retirement pension
• a contributor aged 60 to 64 cannot receive both a retirement pension
and a disability pension
 Pension for the children of a Disabled
Contributor
• A child of a disabled contributor may receive a monthly pension up to
18 years of age, and up to 25 years of age if he or she is enrolled full-
time in an approved educational institution, provided his or her
disabled parent contributed to CPP for the minimum qualifying period
• The flat-rate pension for children of a disabled contributor is the
same as the orphan's benefit under both the CPP and the QPP
 Tax Treatment of CPP Benefits and
Contributions
• CPP benefits are taxable income to the beneficiary
• contributions by employees result in non-refundable federal and
provincial tax credits
• employers can deduct their contributions as a business expense
• self-employed individuals can:
• claim non-refundable federal and provincial tax credits on
contributions made as an employee
• deduct the portion of CPP contributions made as an employer
 The Old Age Security
• A flat rate OAS pension is payable commencing at age 65
• It is increased quarterly to match increases in the Consumer Price
Index
• The OAS recognizes same-sex and opposite-sex, common-law
partners
• OAS pension benefits are taxable income to the recipient
 Basic Eligibility
• Old Rules:
• prior to July 1, 1977, a pensioner qualified for a full OAS pension or no pension at
all
• requirements for a full pension were as follows: You should fulfill one of the three
requirements to qualify for pension.
• a full 40 years of residency in Canada after age 18
• 10 consecutive years of residency in Canada immediately preceding application
for the pension
• if the previous condition was not met, each year of absence could be offset by 3
years of residency between age 18 and age 65, provided the pensioner resided in
Canada during the year immediately preceding application for the pension
 Basic Eligibility
• New rules:
• under the new rules that came into effect on July 1, 1977, a pensioner
qualifies for a full pension after 40 years of residency in Canada after
age 18
• if the pensioner does not qualify for a full pension, he or she may be
eligible for a partial or pro-rated pension after a minimum of 10 years
of residency in Canada after age 18
• if a pensioner reached 25 years of age on July 1, 1977, and had prior
residency in Canada, he or she can obtain benefits under either the
new rules orunder the old rules, whichever are more favourable
 Absence from Canada After an OAS
Pension Commences
• Provided the pensioner lived in Canada for at least 20 years after
reaching 18 years of age, OAS payments will continue even if he or
she leaves Canada
 Tax Treatment of OAS Benefits
• OAS pensions are taxable income to the recipient
• the OAS clawback rate of 15% applies to the portion of net income,
including OAS benefits, that exceeds the OAS clawback threshold for
the year the repayment is based on the difference between the base
income and the threshold amount
• Clawback: Total years’s OAS repayment = (income – OAS threshold) X
(OAS clawback rate)
 Clawback of OAS - Example
Karl’s net income for this year is $85,000. OAS threshold is $77,580.
How much will he incur a clawback of his OAS benefits?

Solution:
[(net income – OAS threshold) x OAS clawback rate] =
[($85,000 – $77,580) x 15%] = $1,113
 Guaranteed Income Supplement
• in addition to OAS benefits, low-income seniors who meet a basic
income test also qualify for the GIS benefit.
• Payable to Canadian residents only. After six consecutive months of
non-residency, payments will be suspended.
• Subject to the earnings test, the payment of the GIS benefit may be
reinstated once he reinstated Canadian residency.
• To qualify for GIS benefits, the senior or in case of a couple, the senior
and his or her spouse or common-law partner, must also satisfy an
earnings test.
• OAS benefits are excluded from the calculation
 Clawback for single individuals
• For a single individual, the maximum monthly supplement is reduced
by $1 for every $2 of pensioner’s base income.
• (GIS clawed back: Base income – earnings exemption) ÷ 2
• Exmple: Jenna is a single pensioner with an annual employment
income of $13,000. She is entitled to the year's maximum GIS amount
of $10,779.85. How much of her GIC benefits clawed back?
• Solution: (13000 – 3500)/2 = $4750
• Jenna’s net GIS benefits = 10,779.85 – 4750 = $6,029.84
 Clawback for Married and Common-law
Partner Couples
• For married and common-law partner couples, the maximum monthly
supplement of each pensioner will be reduced by $1 for every $4 of
their other combined base income.
Married and Common-law partner couples
with only one pensioner
• The maximum monthly supplement will be reduced by $1 for every $4
of the combined base income of the couple.
• The income level cutoff for a person in this category is $43,728.
 The Allowance
• The allowance is payable to low income seniors (subject to an income
test) whose spouse or common-law partner receives the GIS.
• Eligibility:
• Is between 60 and 64 years of age
• Is a Canadian citizen or a legal resident of Canada
• Lived in Canada for a minimum of 10years after age 18
• Has an annual net income that does not exceed the clawback threshold
• Has not been divorced or voluntarily separated from his or her spouse or
common-law partner for more than three months.
• Allowance is paid until the senior becomes eligible for OAS and the GIS.
 The Allowance - Clawback
• The clawback is $3 per month for every $4 of a couples base income up to 4/3
of OAS pension. Above that amount, the clawback is $1 for every $4 of the
couple’s base income.
• Example: John is 66 years of age and Laura is 61 years of age. They had a base
income of $14,500. The maximum annual OAS benefit is $7,217.40. The
maximum allowance benefit is $13,706.64. How much is Laura’s allowance
benefit will be clawed back?
• Solution: Clawback:
• [((OAS benefit x 4 /3) x 3 /4) + ((income – (OAS benefit x 4 /3)) x 1 /4)]
• [(($7,217.40 x 4 /3) x 3 /4) + (($14,500 – ($7,217.40 x 4 /3)) x 1 /4]= $8,437.18
 Allowance for the survivor
• the Allowance for the Survivor benefit is payable to a senior if his or
her spouse or common-law partner is deceased and the senior has
not remarried or entered into a new common-law relationship for
more than 12 months.
• The claw back is $3 per month for every $4 of a widowed person’s
base income up to 4/3 of OAS. Above that the claw back is $1 for $2.
Summary of Rates