Elder Care: Planning with Public Pensions - CPP AND OAS

By Evelyn Jacks, President and Founder, Knowledge Bureau

There are two public pensions available from the government of Canada: the Canada Pension Plan (CPP), and the Old Age Security (OAS). Unfortunately, moving into retirement, many Canadians don’t understand their options for creating pension income under these public plans and for some, the taxation rules that enable pension deferral and income splitting are even cloudier.

The Canada Pension Plan is one of the world’s ten biggest retirement funds[1]. Both employers and employees contribute to the plan; the self-employed must pay both the employer and employee premiums, which are based on maximum contributory earnings levels, set by the government.

The retirement benefits received are based on the premiums paid into the plan over time; they are both indexed and taxable. It is possible to assign half of the benefits you receive to your spouse, as long as that person has also reached the age of 60, to facilitate some income splitting.

Beginning in 2019, enhancements will be made to the Canada Pension Plan to increase the pension available to the current generation of workers in their retirement. The benefits received will increase from the current 25 percent to 33 percent of pensionable earnings - that’s the good news.

What that means to current employees of all ages; however, is that their premium payment rate on pensionable earnings will increase over the period from 2019 to 2023. A Canada Workers Benefit will be introduced to offset the extra costs for lower income earners. This is a new and improved “Working Income Tax Benefit”, that will be in its last year on the 2018 tax return.    

High income earners will be especially hard-hit by the premium increases. In the year 2024, an additional premium of 4% will be added to the rate increases paid by everyone else. This extra premium will be required on income over the maximum pensionable earnings (estimated to be on incomes between $70,100 and $74,900). In 2025, that new premium will apply on the first $10,200 over the maximum pensionable earnings (pensionable earnings between $72,500 and $82,700) and both the employer and the employee will pay it. The additional premiums will be tax deductible, as opposed to a non-refundable credit.

TFSA/RRSP Top-up Strategy

The net effect of these new rules is that take-home pay will erode, particularly for higher earners, beginning in 2024. For these reasons, it’s important to top up TFSA and RRSP contributions now, especially if you plan to be in the workforce for several years into the future.

Electing to Start CPP Early or Late

Workers who are closer to retirement have a different concern: should I elect to receive my CPP retirement pension before or after age 65? It’s a good question. It is possible to receive CPP retirement benefits as early as age 60, but here’s some information that may help you decide if that’s right for you:

• Late starts: Your pension will be augmented by 0.7% for each month you postpone receipt of the CPP. For example, a pensioner who begins receiving their CPP retirement pension in 2018 at age 70, would receive 142% of their age 65 pension entitlement.
• Early starts: The reduction for early pension take-up is 0.6% per month. In this case, a pensioner who began to receive a CPP retirement pension at age 60 in 2018, would have noted a 64% reduction in the maximum pension receivable at age 65.

What is the optimal age to begin receiving the CPP? The answer depends on two primary factors:

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, because the maximum pension applies to the sum of the survivor and retirement pensions. If you are a widow or widower, consider taking topped up CPP benefits at age 70, to receive more of your survivor pension prior to this event.
2. How long will the taxpayer live? For taxpayers who have a shorter than normal life expectancy, a reduced pension at age 60 makes sense. For those who are healthy and expect to live long lives, the increased pension received by waiting until age 70, could result in a larger amount over the taxpayer’s lifetime.

The Old Age Security pension is a taxable monthly payment available to most Canadians aged 65 or older, regardless of income or wealth accumulation. However, some of these benefits, which are indexed to the cost of living, may be “clawed back” on an annual basis, when the tax return is filed.

Canadian residents will receive a notice of eligibility soon after their 64^th birthday with an option to defer receiving the OAS, if they choose to do so. As such, it is recommended to apply as soon as possible after your 64^th birthday, if you haven’t received the letter, unless you want to defer, per the below explanations. Newcomers to Canada must have been resident in Canada for at least 10 years to qualify. Residents for fewer than 40 years after turning 18 may not qualify for the full OAS pension.

Clawbacks (OAS Repayment Payable):

If your net income exceeds an indexed threshold amount ($75,910 in 2018), a repayment of OAS is required when you file your tax return. When net income exceeds $123,386, the entire OAS pension received is repayable. Specifically, the individual must repay the lesser of:

• Net income² in excess of the income threshold, and;
• 15% of net OAS (plus net Guaranteed Income Supplements) received

The resulting “Social Benefits Repayment” is deducted from income and added to taxes payable. Then, beginning July 1 and continuing to June 30 after filing, OAS payments are reduced each month[3] by one-twelfth of the repayment payable. This amount is deemed to be “income tax withheld” reported on a T4A(OAS) Statement of Old Age Security for the next year and it will reduce taxes that would otherwise be payable.

Should OAS be deferred?

Seniors do have the option to defer receiving their OAS pension for up to five years, similar to the CPP rules. If you choose this option, you simply don’t apply for your pension at age 65. If OAS payments have started, you have six months to elect to stop.  Note that any benefits already received will have to be repaid. 

Why defer OAS?

You will receive a proportionately larger pension - to the tune of 0.6% per month - for each month you defer from age 65 to 70. The maximum pension increase is 0.6% x 60 months or 36%.

Who should elect to defer?

Taxpayers subject to a full clawback of OAS in the year they turn 65, should elect this option. Those with incomes under the clawback thresholds, who anticipate living beyond age 84, will benefit from the maximum delay of OAS pension to age 70. As the current life expectancy (as of age 60) is 87 years for men and 89 for women, it is a strategy that can pay off, unless starting earlier comes with purposeful and achievable investment goals – specifically, earning an annual return in excess of 7.2%. Those who have a reduced life expectancy and income under the maximum thresholds should  apply for OAS before age 70.