Impacting Pre-Retirees: Notable CPP Changes

Did you know that there are more changes coming to the Canada Pension Plan in 2019? Most Canadians are unaware, and even those in the know find that the CPP planning process is quite confusing. There is opportunity here for tax and financial advisors to help bring their pre-retiree clients up to speed before the end of tax season.

What do Canadians need to know about the CPP?  The Canada Pension Plan is contributory – both employer and employee are required to remit premiums – but it can be lucrative: the value of the retirement benefits over a 25-year average retirement period is almost $496,000 (assuming 3 percent inflation).

CPP retirement benefits are taxable to the recipient and are reported on a T4A(P) slip. The maximum benefit for the 2018 year is $13,610.

The CPP retirement benefit can be split by assigning up to half of the amount received to a spouse, if both the recipient and the spouse are at least age 60 and the non-recipient spouse has never contributed to the CPP. This is an important way to reduce instalment payments and Old Age Security clawbacks for the higher income earner.

Since 2012, it has been necessary for those between age 60 and 64 to continue to contribute to CPP if they are working and drawing benefits from the plan. As mentioned, those benefits are taxable. From age 65 to 69, recipients of the CPP retirement benefits who are still working may elect to opt out of paying premiums by filing a new form CPT30 Election to Stop Contributing to the CPP. The self-employed can opt out on Schedule 8 of the T1 return.

Additional contributions made in this period for those who don’t opt out will be saved in a “Post Retirement Benefit” (PRB) account to bump up monthly pension benefits, albeit slightly, beginning the following year. The PRB cannot be split with the spouse.

When should Canadians Start Taking CPP?  Probably the biggest question that Canadians have about their CPP is whether to start taking it early or late.  Here are some considerations:

• Taxpayers who elect to receive their CPP retirement pension before or after age 65 receive an adjusted pension amount. The augmentation rate for those who elect to start CPP after age 65 is 0.7 percent for 2014 and subsequent years. For example, a pensioner who begins receiving their CPP retirement pension in 2017 at age 70 would receive 142 percent of their age 65 pension entitlement.
• Beginning in 2012, the reduction for early pension take-up was increased to 0.6 percent per month. This means that a pensioner who began receiving a CPP retirement pension in 2017 would have received a pension that is reduced to 64 percent of the amount they would have been entitled to at age 65.

Should an Individual Elect to Begin CPP at Age 60, Age 65, or Age 70?   This question is not as simple as one might think. The answer depends on a number of factors, including:

1. Is the taxpayer currently receiving a CPP survivor pension? Any survivor pension will likely be reduced or eliminated once the taxpayer begins receiving the retirement pension, as the maximum pension applies to the sum of the survivor and retirement pensions.
2. How long will the taxpayer live? For taxpayers who have a shorter than normal life expectancy, it may make more sense to begin receiving a reduced pension at age 60, as the total received during their lifetime will be less if they wait. For those who will live longer than normal, the increased pension received by waiting until age 70 could result in a larger amount being received over the taxpayer’s lifetime. In addition, a postponement of the benefits could allow for room to add other taxable amounts into income earlier – RRSP or RRIF withdrawals for example – with the effect of “averaging down” the tax on combined pension income.
3. Will receiving an enhanced CPP pension result in an OAS clawback once the taxpayer starts receiving CPP and OAS?
4. Note that combined survivor and retirement benefits will not exceed the maximum retirement benefit of one contributor, which means there is zero benefit to the surviving spouse with a maximum benefit entitlement.

The above will impact on the role of other retirement income funding opportunities and should be compared to other joint-last-to-die funding options. No doubt, this will take some number crunching. 

Fortunately, Knowledge Bureau has developed a number of additional educational resources to help with these decisions:

• Knowledge Bureau’s CPP Income Calculator - Should you draw from the CPP early? This calculator will help you answer that question by determining break-even points along the way, while explaining the rule and criteria changes that took place in 2012 and subsequent years. A free trial is available!
• Knowledge Bureau’s EverGreen Explanatory Notes
• Knowledge Bureau’s MFA Retirement and Estate Services Specialist Designation Program
• Knowledge Bureau’s Tax Efficient Retirement Income Planning Course

Note: There’s an upcoming registration deadline on June 15, 2018 for all programs and courses. Enroll today!

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