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Government Pensions
 
How does the Canada Pension Plan work?
How is the CPP Pension Determined?
What is Old Age Security?

How does the Canada Pension Plan work?

The Canada Pension Plan or CPP is a contributory, earnings-related social insurance program. It provides benefits to contributors on retirement, disability and death. The CPP applies throughout Canada except in Québec where a similar program, the Québec Pension Plan (or QPP), is in force. The two programs are coordinated under agreements between the two governments.

The program covers virtually all employed and self-employed persons in Canada (except in Québec where the QPP applies) who are between the ages of 18 and 70 and who earn more than a minimum level of earnings in a calendar year.

The CPP is financed through contributions from employees, employers and self-employed persons, as well as investment earnings from the Canada Pension Plan Fund. Starting in 1998, a new CPP Investment Board will invest all new contributions in capital markets to achieve a better return. Human Resources Development Canada administers the Canada Pension Plan through a network of Human Resource Centers of Canada located in principal cities and towns across the country.

Government of Canada CPP Web Site

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How is the CPP Pension Determined?

CPP Retirement pension

Any person who has made contributions to the CPP is eligible to receive a monthly retirement pension at any time after the contributor's 60th birthday. However, for a retirement pension to be paid prior to age 65, the contributor must have substantially ceased to be engaged in paid employment or self-employment.

The retirement pension payable to a person at age 65 is a monthly benefit equal to 25 percent of a contributor's average monthly pensionable earnings during the contributory period. The maximum pensionable earnings is set to the average industrial wage ($52,500 per year in 2014).

An individual's contributory period is defined as the period starting on January 1, 1966, or when the contributor reaches age 18, whichever is later, and ending when the individual begins to receive a retirement pension from the CPP or QPP or reaches age 70.

In calculating average monthly pensionable earnings, actual pensionable earnings from past years are adjusted to reflect current values.

However, any month of disability is excluded from the contributory period. Also, periods of low or zero earnings (up to 15 percent of an individual's contributory period) may be excluded in calculating average monthly pensionable earnings. The intent is to compensate for periods of unemployment, illness or schooling. Months of low or zero earnings while caring for a child under the age of seven may be excluded from the contributory period, if the contributor received Family Allowances or was eligible for the Child Tax Benefit. This is called the "child-rearing drop-out provision".

Persons who continue to work and make contributions to the CPP after age 65 may substitute periods of pensionable earnings after 65 for periods before age 65 when they had low or zero earnings.

An individual who starts to receive his or her CPP Benefits at the traditional retirement age of 65 is eligible for a maximum CPP Pension of $1,038.33 per month (or $12,460 per year) in 2014. The maximum applies to individuals who had incomes near or above the maximum pensionable earnings for a substantial portion of the contributory period.

A simple formula determines how the benefit changes should the recipient choose to start the CPP Pension before age 65 or wait until after age 65. The amount of a retirement pension starting before age 65 reduces by 0.5 percent for each month between the date the pension commences and the date of the contributor's 65th birthday. Similarly, a pension beginning after age 65 increases by 0.5 percent for each month between the 65th birthday and the month for which the first payment is made. The maximum upward or downward adjustment is 30 percent.

All CPP benefits are adjusted in January of each year to reflect increases in the cost of living, as measured by the Consumer Price Index. The CPP pension must be included in taxable income.

Government of Canada CPP Web Site

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What is Old Age Security?

Old Age Security or OAS is a social insurance program that provides a basic level of pension income, on application, to anyone age 65 or over who meets residence requirements. OAS is financed from the general tax revenues of the Federal Government. All benefits under OAS are adjusted quarterly each year in line with rises in the cost of living as measured by the Consumer Price Index. The OAS pension effective January 2014 is $551.54 per month (or $6,618 per year).

Persons who are Canadian residents must include the basic Old Age Security pension in their taxable income. Persons who reside outside Canada are subject to tax withholding on their basic Old Age Security pension. The usual rate of withholding tax is 25%. However, persons who live in countries with which Canada has concluded a tax treaty that specifies a rate of withholding lower than 25% are only subject to that lower rate.

A minimum of 10 years of Canadian residency after reaching age 18 is required to receive an Old Age Security pension in Canada. To receive OAS outside the country, a person must have lived in Canada for a minimum of 20 years.

The amount of a person's pension is determined by how long he or she has lived in Canada. A person who has lived in Canada, after reaching age 18, for periods that total at least 40 years will qualify for a full OAS pension. A person who cannot meet the requirements for the full OAS pension may qualify for a partial pension. A partial pension is earned at the rate of 1/40th of the full monthly pension for each complete year of residence in Canada after reaching age 18.

The amount of Old Age Security pension paid to persons with high incomes is reduced through a recovery provision of the Income Tax Act. For 2014, the tax recovery applies to persons whose total income exceeds $71,592. For every dollar of income above this limit, the amount of basic Old Age Security pension reduces by $0.15.

Government of Canada Old Age Security Web Site

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