Pensioners still unclear about OAS and CPP Options
As a a result of significant pension reforms, the way Canadians contribute to and access their public and private pensions has changed recently and there are New Options available.
Calculating estimations on taxes payable for 2018 as a result of income splitting opportunities is important too.
Deferring OAS. Since July 1, 2013, Canadians have had the option to defer receiving their OAS pension for up to five years. If you elect to do so you will receive a proportionately larger pension when you do start to receive it. This may also enable you to withdraw other taxable amounts first, like deposits in an RRSP, in a more tax-efficient manner. You would want to do this if your net income is always going to high in the 5-year period, and OAS, as a result, will be clawed back.
The OAS is clawed back. You will start receiving reduced benefits when individual net income reported on your tax return exceeds $75,910. Your benefits will stop completely when income exceeds about $122,400 in2018. Assuming no claw-back, the amount that is receivable differs quarterly with an indexing factor, as shown below:
Canada Pension Plan (CPP) Changes
CPP retirement benefits are taxable to the recipient and are reported on a T4A(P) slip. The maximum benefit is $13,610 for the year (2018) and the value over a 25-year average retirement period is almost $496,000 (assuming 3% inflation).
CPP retirement benefits splitting.
The CPP retirement benefits can be split by assigning up to half of them 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 can be an important way to reduce installment payments and claw-backs of the Old Age Security for the higher income earner.
Collecting CPP and Working.
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.
In either case, 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 your monthly pension benefits – albeit slightly – beginning the following year. The PRB cannot be split with the spouse.
New CPP Enhancements for 2019.
Further enhancements to the CPP will begin on January 1, 2019: Child rearing drop-in provision. For each year in which a child is under age 7, an annual amount will be “dropped in” to the CPP retirement benefit calculation equal to the parent’s average earnings during the five years prior to birth or adoption of the child if that amount is higher than the actual earnings in this period.
Disability drop-in provision. A drop-in amount of 70% of earnings will be made for the years in which someone was receiving the CPP disability pension for a severe and prolonged disability. This will increase retirement benefits for both the disabled person and their spouse.
Elimination of reduction benefits for young survivors.
Widows/widowers under the age of 45 will no longer have their survivor’s pension reduced as a result of their age; about half of young survivors will also become eligible to receive survivor’s pensions before age 65. In addition, recipients of CPP retirement benefits who develop a severe and prolonged disability while under the age of 65 will now be able to receive a top-up to the level of the CPP disability benefits, which are larger than the retirement benefits.
Lump sum death benefits.
A one-time lump sum death benefit of up to $2500 has been payable to the surviving spouse or estate of a CPP contributor who has passed away. A flat rate amount will now be paid, regardless of actual contributory earnings of the deceased. Regrettably the government did not take this opportunity to index the lump sum benefit.
Electing to Start CPP Early or Late.
Taxpayers who elect to receive their CPP retirement pension before or after age 65 receive an adjusted pension amount. The augmentation rate is 0.7% for 2014 and subsequent years. A pensioner who begins receiving their CPP retirement pension in 2017 at age 70 would receive 142% of their age 65 pension entitlement.
Beginning in 2012, the reduction for early pension take-up was increased to 0.6% per month. This means that a pensioner who began receiving a CPP retirement pension in 2017 would have received pension that is reduced to 64% 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:
- 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.
- 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 ‘til 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 – RRSP or RRIF withdrawals for example – with the affect of “averaging down” the tax on combined pension income.
- Will receiving an enhanced CPP pension result in an OAS claw-back once the taxpayer starts receiving CPP and OAS?
- 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.
Other pension planning considerations in 2018 and beyond:
Pooled Retirement Pension Plans (PRPP). This new type of pension plan was passed into law by the federal government in 2012 and provincial legislation has since followed for most provinces. The plan provides a voluntary and affordable alternative for small employers to offer an employer-sponsored pension plan at work, with contribution levels will mirror those available under the Registered Pension Plan (RPP) defined
contribution or money purchase rules.
Individual Pension Plan (IPP) Rules. Individual Pension Plans are established for an owner-manager who is an employee of his or her own corporation. Annual minimum amounts are required to be withdrawn from the IPP once the plan member is 72, similar to the rules under the Registered Retirement Income Fund (RRIF). Also, contributions related to past years of employment will now have to come from RRSP or RPP assets or by reducing RRSP contribution room, before deductible contributions to an IPP can be made.
Changes to German Pension Filing Rules. If you receive German social security pension it’s reportable in Canada, but you may qualify to claim a partial exempt portion. You will have filing obligations in Germany. Taxpayers have had trouble getting Canada to recognize the allowable foreign tax credits; but they are properly claimable on income that is taxed both in Canada and Germany.
Registered Disability Savings Plan (RDSP) Rule Changes. First established in 2008 the RDSP is used to accumulate private pension funds for the benefit of a disabled person. RDSPs function in a similar fashion to RESPs, in that contributions are not tax deductible, earnings accumulate on a tax deferred basis and the government contributes grants and bonds to enhance savings. Any person eligible to claim the Disability Amount can be the beneficiary of an RDSP and the plan can be established by them or by an authorized representative. Until the end of 2023, a plan holder may be a family member if the beneficiary’s capacity to enter into a contract is diminished.