CPP Child Rearing Dropout Provision (CRDO) – the ugly
The Child Rearing Dropout (CRDO) provision of the Canada Pension Plan (CPP) isn’t an actual paid benefit, but it’s an important provision nonetheless. While it’s generally helpful, its impact isn’t always fair. This article is the third and final article of a three part series. In case you missed it, here are the first two articles:
- The Good of the CPP Child Rearing Dropout Provision
- The Bad of the CPP Child Rearing Dropout Provision
Part III – the ugly
The impacts of the CRDO provision are downright ugly when it overlaps with another provision of the CPP, known as credit splitting, or more properly, as Division of Unadjusted Pensionable Earnings (DUPE). Most people know this as CPP splitting or sharing.
Related article: The difference between CPP Splitting and Pension Splitting
Although both provisions are generally positive on their own, they were definitely not designed to work together. I call this situation the CRDO/DUPE overlap issue.
The DUPE provision could probably justify an article on its own, but for now let’s just say that a DUPE applies when a couple separates or divorces, and the outcome of the DUPE is an “equalization” of the unadjusted pensionable earnings (UPE) of the former couple for the entire period of the relationship, including any period of CRDO eligibility.
The result of this “equalization” of UPE only, while ignoring the value of the CRDO, is that the CRDO-eligible spouse has an advantage over the other spouse when their benefits are calculated. Also, this situation often results in a net loss of benefits to the “couple”, with a corresponding savings to the CPP fund. I’ll deal with each of these aspects separately below.
How does the CRDO provision interact negatively with the DUPE provision?
As mentioned above, a DUPE equalizes the UPE for the entire period of the relationship, including any period of CRDO eligibility. As you might remember if you read my article on how to calculate a CPP retirement pension: CPP benefits are calculated on the basis of “average lifetime earnings” after applying the various dropout provisions.
If two people have identical UPE records (such as after a DUPE) but one of them can drop out more of the low earnings, that person’s benefit will likely be greater (it can never be lesser).
Let’s look at an example that demonstrates this point!
Doug and Judy, were married for 30 years, from age 18 until age 48, at which time they separated and divorced. They had two children, born 3 years apart. Judy is thus eligible to claim the CRDO for the 10-year period starting from the month following the birth of the first child through until the month that the second child turned seven years old.
Doug made maximum CPP contributions for the entire 30-year period of the relationship and he continued doing so until he retired at age 57.
Judy worked part-time making half-maximum CPP contributions for the first 10 years of the marriage. She stayed at home raising the children for the next 10 years. She then started working full time and made maximum contributions until age 57, when she also retired.
Judy applied for a DUPE, and the result was that their UPEs were shared equally for the 30-year period of their relationship. By coincidence, they also had identical earnings and contributions after the relationship ended, and they both applied for their CPP retirement pension at age 65.
The following chart shows this earnings scenario and resulting CPP benefit eligibility:
|Doug’s UPE||Judy’s UPE||Doug’s UPE||Judy’s UPE|
|10 years from age 18 to 28||100% Max||50% Max||75% Max||75% Max|
|10 years of CRDO from age 28 to 38||100% Max||Zero earnings||50% Max||50% Max|
|10 years from age 38 to separation at age 48||100% Max||100% Max||100% Max||100% Max|
|9 years from age 48 to retirement at age 57||100% Max||100% Max||100% Max||100% Max|
|8 years from age 57 to 65||Zero earnings||Zero earnings||Zero earnings||Zero earnings|
|CPP retirement pension using 17% dropout only||100%||61.5%||80.75%||80.75%|
|CPP retirement pension using 17% and CRDO dropouts||n/a||78.15%||n/a||86.3%|
How then does the CRDO-eligible spouse have an advantage over the other spouse?
Based on the above chart, you can see that Doug’s post-DUPE CPP retirement pension will be 80.75%, because he is not eligible for the CRDO provision.
Without the CRDO provision, Judy would have the same post-DUPE entitlement as Doug, but her CPP retirement calculation rises to 86.3% as a result of being able to drop out those 10 extra years under the CRDO.
The end result is that Judy’s CPP retirement pension is 6.9% greater than Doug’s, even though they have identical UPEs for their entire 47-year contributory period. The cause is that although the DUPE equalizes their UPEs, it allows Judy to retain sole access to the CRDO provision.
How does the CRDO/DUPE overlap issue create a net loss of benefits to the “couple”?
Looking again at the above chart, you can see that their total pre-DUPE eligibility was 178.15% (Doug 100% and Judy 78.15%), whereas their total post-DUPE eligibility is only 167.05% (Doug 80.75% and Judy 86.3%).
This means that the net impact of the DUPE was a loss of 11.1% of a maximum CPP retirement pension, or approximately $112 monthly. If they lived to the age of 82, this would amount to approximately $23,000 in lost benefits.
What can be done about the CRDO/DUPE overlap issue?
You need to calculate the impact of a credit split in advance. If a credit split will produce a fair and equitable result, then that is the best option. If not, I’d generally recommend an alternative that would produce a fair result and maximize CPP benefits for the “couple”, instead of creating a net loss of benefits to them.
Thank you for this! I had not heard of this before reading your post, and I’m pretty sure there are many people in the same situation…I will be sure to refer others to your blog. Keep up the good work!
Based on the last 10 years, there have been approx. 9,000 CPP credit splits annually and about half of them have involved periods of CRDO eligibility. That means that about 4,500 “couples” lose CPP entitlement each year, and most of them are totally unaware of it.
The only time it becomes obvious is when both of them are receiving CPP benefits when the credit split occurs, and it is easy to see that the one spouse loses much more than the other spouse gains.
A few cases have gone to court, but even if both spouses agree that the outcome is unfair, the courts have not seen fit to do anything about it.
If you want to know a few more numbers around this issue is that the maximum loss to the “couple” for each year of CRDO/DUPE overlap is about $12.50 per month, and the average period of overlap in these situations is about 9.5 years.
That means that the average loss is potentially $118.75 monthly or $1,425 yearly. If the average person in this situation receives their CPP for 20 years, they would potentially have lost $28,500 in their lifetime, as a result of the CRDO/DUPE overlap.
If you apply this loss to the approx. 45,000 cases that have occurred over the past 10 years and the total comes to $1,282,500,000 in lost benefits (or a savings to the CPP, depending on how you look at it).
I just can’t figure out why the CPP isn’t rushing to fix this situation, having known about the issue for at least the last 15 years. Can you?
I have a question you may, or may not be able to answer.
I have just learned of the child rearing option. This makes sense to me as my income was interupted by raising our children and subsequent retraining. Our last child had a severe disability which meant that I had to reamin home for longer than the 7 years mentioned. She went to school part time, and therapy part time, but someone had to be home to ready her for 8:40 when she left for school/therapy, and assist her at 3:40pm when she returned; there was no day care that could take her. At the time of her death at 11 years, I had been out of the work force for over 16 years. This meant that I had to return to school for retraining (drafting had moved on to AutoCAD), and then return to the workforce.
Is there any provision for the additional years where I was required to remain home with our child.
Unfortunately, the child-rearing dropout provision (CRDO or CRP) just allows you to specifically drop out any period up to when your child turned age 7.
The general dropout however, will let you drop out 17% of your remaining lowest-earning years.
Combined with the CRP, the 17% dropout may cover most of those years of low or no earnings.
Thank you for your response and time.
In the examples the couple had separated or divorced. Do the same problems occur when a couple that is not separated or divorced elect to share their CPP benefits.
Mart – It’s easier for a male parent to claim CRDO in an ongoing relationship, but he still needs the consent of the female parent and/or proof from Revenue Canada to confirm that he did receive (or could have claimed) the Child Tax Benefit for whatever periods he wants to claim the CRDO.