The intent of the Canada Pension Plan (CPP) Child-Rearing Dropout (CRDO) provision is to ensure that a parent who stayed at home to raise children isn’t penalized by those years of low or no earnings when their CPP benefit is calculated.
It sounds reasonable, but as I said in my previous article on the Child Rearing Dropout Provision, the CRDO has its Good, its Bad, and its Ugly aspects. Here is the second installment in this trilogy─the Bad!
Part II – The Bad of Child Rearing Dropout
I consider two aspects of the CRDO to be bad:
- ·First, although Service Canada publications say that the primary caregiver can apply for the CRDO, it isn’t always the primary caregiver who is eligible.
- ·Second, the way that the CRDO is applied can sometimes be unfair.
I’ll deal with each of these aspects separately below.
Who is eligible for the CRDO?
For periods of CRDO eligibility before 1993, the person who is entitled to claim the CRDO is the parent who was eligible to receive the Family Allowances (FA). Under the Family Allowances Act, FA benefits were always paid to the female parent unless the parents were separated and the child was living primarily with the male parent. That means that the female parent always has primary right to claim the CRDO, and the male parent can qualify only if:
- He remained at home during this period.
- He was the primary caregiver for the child(ren).
- The female parent waives her rights to the CRDO and/or doesn’t claim it herself.
For periods of CRDO eligibility since 1993, the person who is entitled to claim the CRDO is the parent who was eligible to receive the Child Tax Benefit (CTB). While eligibility for the CTB is less gender-biased than for the FA, the female parent is still the primary recipient of CTB under the Income Tax Act and thus has primary eligibility for the CRDO. For situations where the male parent was the primary caregiver for the child(ren) but didn’t apply for the CTB in his own name, he will need the consent of the female parent in order to qualify for the CRDO.
This use of past eligibility for FA or CTB as the main criteria for determining CRDO eligibility, means that a female parent can often claim the CRDO on that basis alone, even if the male parent was the primary caregiver.
How does the CRDO work?
In my previous article, I talked about the difference between CRDO 1 and CRDO 2, but I didn’t describe in detail how they are actually applied.
One of the main reasons why the CRDO doesn’t work well is that the CPP doesn’t track earnings and contributions on a monthly basis. Instead, any earnings for a calendar year are “deemed” to have been earned equally for every month in that year. This can create some unfairness when the primary caregiver wants to claim the CRDO for only part of a year. It can also create some unfairness if a couple wants to share the parenting and share the CRDO eligibility. Probably the best way to demonstrate these situations is to look at the following examples.
Sharon works right up until just before her child is born in August, by which time she has earned $30,000 for the year. She doesn’t work again for the rest of that year, and she assumes that she can use the CRDO to drop out the remaining four months of zero earnings (September to December).
However, under the CPP, the $30,000 is deemed to have been earned equally throughout the 12 months of the year, or $2,500 monthly. When she applies for a CPP benefit and claims the CRDO, the four months of zero earnings will be dropped out only if her “deemed” earnings of $2,500 monthly is less than her average lifetime earnings.
Furthermore, if those four months are dropped out, she will also drop out $10,000 of earnings credits (4 x $2,500), and be left with $20,000 of earnings credits over the remaining eight months, rather than the $30,000 that she actually earned.
Susan and Peter agree that they will share the parenting of their child equally. Susan remains at home to look after their three-year-old child from January to June; Peter remains at home from July through December. They both have good jobs that give them this flexibility, and they each earn $36,000 in the six months that they do work. Both claim the CTB for the six-month period that they were the primary caregiver, and both assume that they will be able to drop out six months of zero earnings under the CRDO.
Unfortunately, they’re caught in the same situation of “deemed earnings” as in Example 1, where the earnings will be deemed to have been earned equally over the full year at $3,000 monthly. CRDO will apply only if this amount is less than their average lifetime earnings. Furthermore, if those six months are dropped out, the corresponding deemed earnings are also dropped out, and they will each be left with six months in their contributory periods and only $18,000 dollars of earnings not $36,000.
If a couple wants to share parenting, they may want to consider doing so in full calendar-year periods, at least from the perspective of maximizing the benefit of CRDO eligibility.
This issue of gender bias regarding CRDO eligibility creates some minor unfairness when a relationship remains intact, but it creates some real issues when a relationship breaks down. I’ll talk more about this latter situation in Part III (The Ugly).