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Maximizing Government Retirement Benefits
March 2004 

If you are retired or approaching retirement, like most Canadians you are likely thinking about how you can maximize your disposable income. In addition to your retirement savings and any private pension plans you may have, you may receive two sources of income from the Government of Canada - the Old Age Security (OAS) and the Canada Pension Plan (CPP).  

Understanding the applicable rules for the OAS and CPP/QPP benefits and the impact on your tax position for your coming or current retirement years can help you make the best planning decisions and maximize your tax savings. 

Old Age Security
Financed from the Federal government general tax revenues, the OAS is a monthly benefit that is available to most Canadians 65 years of age or over. You must be a Canadian citizen or a legal resident of Canada to apply for this benefit. 

Your employment history is not a factor in determining your eligibility but rather the amount of your pension relates to how long you have lived in Canada. If, after reaching the age of 18, you have lived in Canada for periods that total at least 40 years, you qualify for a full OAS pension. You may also qualify for a full pension if you were born before July 1, 1952 and meet certain residency requirements. 

If you do not meet these requirements for the full OAS, you may qualify for a partial pension. The partial pension is earned at the rate of 1/40th of the full monthly pension for each year you have lived in Canada after your 18th birthday. 

Currently, the maximum monthly OAS is $461.55. The amount is adjusted in January, April, July and October of each year when there are increases in the costs of living. Of course, the pension is subject to federal and provincial income tax. If your annual income is more than $57,879, the OAS is subject to a clawback on an increasing scale. What this means is that pensioners with high incomes must repay part, or all, of their benefit through the tax system. At an annual income of $94,530 the OAS is completely recovered. 

Depending on their financial circumstances, low-income pensioners may choose to: 

-  Receive the full OAS benefit each month, without having taxes withheld at source, or  

-  Have income tax withheld from the monthly OAS payment instead of having to make quarterly tax instalments on this amount.  

Canada Pension Plan
With very few exceptions, anyone over the age of 18 who earns a salary must pay into the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). You and your employer each pay half of the contributions. If you are self-employed, you pay both portions. 

Your CPP benefits on retirement are based on your earnings and contributions. While the CPP operates throughout most of Canada, the province of Quebec has its own similar program, the QPP. Both plans work together to ensure that all contributors are protected.  

It is important to remember that CPP/QPP calculations include both how much and how long you have contributed. Generally, the more you contribute to the CPP/QPP during your working years, the higher the benefit will be because you will have built up pension credits.  

The total span of time during your life when you may contribute is called your contributory period, which is used to calculate your entitlement to the amount of any pension benefit. If you have been contributing the maximum level, you will receive the maximum benefits. However, to maximize your pension benefits, some parts of your contributory period can be dropped out of the calculation. For example, 15% of your lowest earning years is not included in the calculation. If you receive a CPP disability pension, the time during which you receive this benefit is also not included.  

Currently, the maximum monthly amount receivable by a taxpayer is $801.25. CPP is structured to replace about 25% of the earned income on which premiums are paid.  

While CPP benefits are designed to be paid starting at age 65, if you are not working or have a low income, you can apply for a retirement pension as early as age 60. In this case, your retirement pension is reduced by 0.5% for each month you are under age 65. 

Alternatively, if you are still working at age 65, you can elect to continue to contribute to the CPP until you are age 70, at which time you start receiving your pension. In this case, your benefits are increased by 0.5% for each month after age 65. Your chartered accountant can assist you in determining the best time to start taking your CPP benefits. 

Also make sure that you review your earnings and contributions on your Statement of Contributions that is sent to you periodically. The statement shows, by year, the total amount of your CPP/QPP contributions and your "pensionable earnings" on which they are based. If you are over age 30, it also estimates what your pension or benefit would be if you were eligible now. This statement can be a valuable tool for understanding the retirement income you have available in combination with any other pension plans or retirement savings you may have. 

If you want to receive an updated statement, contact the Human Resources Canada Centre or Revenue Quebec nearest you. 

CPP Pension Sharing
If you and/or your spouse/common-law partner are already receiving CPP retirement benefits, you may apply to share your CPP pension benefits on the portion of the benefit earned during your time together. The Quebec Pension Plan also has a provision for pension sharing but with different eligibility requirements. For some couples, pension sharing may result in tax savings. 

To qualify for CPP pension sharing, you must both be at least 60 years of age, be together (not separated or divorced) and have applied, or already be receiving, a CPP retirement pension.  If only one is a CPP contributor, you can share that one pension. The overall benefits paid do not increase or decrease with pension sharing. 

Pension sharing is particularly beneficial if one spouse/common-law partner has never earned income and is therefore not eligible to receive CPP. If, for instance, the contributor received the maximum of $801 a month, he or she may be able to assign up to 50% of the CPP entitlement to his or her spouse/common-law partner. The assignment may prevent the taxpayer from moving into a higher tax bracket. 

Pension sharing may also result in tax savings where one spouse/common-law partner has earned a higher income and therefore receives a higher CPP amount. The higher income earner can assign a portion of his or her CPP to the lower CPP recipient.  

If your marriage or common-law relationship ends or either partner dies, the pension-sharing arrangement will end. It will also end if both of you request that it be cancelled. 

While sharing your pension may mean possible tax savings, it could affect your tax position if you currently claim the spouse/common-law partner deduction. If you and your spouse/common-law partner are considering pension sharing, be sure to talk to your chartered accountant to determine if this is a viable strategy for reducing your income tax.  

CPP Credit Splitting on Separation or Divorce
The Canada Pension Plan recognizes that in a legal marriage or common-law relationship, both of the spouses/common-law partners share in the building of their assets and entitlements, including their CPP pension credits. When a relationship ends, a couple can divide the CPP pension credits they have built up during the time they lived together. This division is called "credit splitting".  

Generally, the credits of one person (the lower earner) are increased and the credits of the other (the higher earner) are reduced by the same amount. Credits can be split even if one spouse or common-law partner did not pay into the CPP.  

If you and your spouse/common-law partner have been contributing to only the Quebec Pension Plan and neither of you have ever worked outside the province of Quebec, the above information is not applicable. Contact Revenue Quebec for the applicable information on QPP credit splitting.  

Child Rearing Drop Out (CRDO) Provision 
The CPP provides that time spent with no or low earnings while you are caring for a young child are excluded from the calculation of your pension.  This ensures that reduced earnings during the first 7 years of your child’s life will not result in lower pension benefits in the future.  To apply for the CRDO provision, complete the special form when you apply for any CPP benefit.  Either parent is eligible. 

For more information about federal retirement benefits
Phone 1-800-277-9914
Website www.canadabenefits.gc.ca

Talk to Your Chartered Accountant