Two conundrums of Canada Pension Plan

Janet is turning 60 and is wondering about the two basic conundrums of Canada Pension Plan (CPP). First, she would like to know if she should consider taking CPP early and secondly, if she should she split her CPP with her 67-year-old husband Will. Her first instinct is to wait to take CPP because unlike her husband, she does not have a pension plan. While she does not need much income while Will is still alive, she feels she needs more income when Will passes away because his pension will drop 40% when he passes away.

Taking CPP early

Canada Pension Plan is normally taken at age 65. That being said, Janet can take CPP as early as age 60 and as late as age 70. To evaluate this lets introduce you to Janet’s twin sister Beth. Let’s assume they both qualify for the same CPP of $502 per month at age 65. Let’s further assume, Beth decides to take CPP now at age 60 at a reduced amount while Janet decides she wants to wait till 65 because she will get more income by deferring the income for 5 years.

Under CPP benefits, Beth can take CPP at age 60 based on a reduction factor of 0.5% for each month prior to her 65th birthday. Thus Beth’s CPP will be reduced by 30% (0.5% x 60 months) for a monthly income of $351 starting on her 60th birthday.

Let’s fast forward 5 years. Now, Beth and Janet are both 65. Over the last 5 years, Beth has collected $351 per month totaling $21,060. In other words, Beth has made $21,060 before Janet has collected a single CPP cheque. That being said, Janet is now going to get $502 per month for CPP or $151 per month more than Beth’s $351. The question is how many months does Janet need to collect more pension than Beth to make up the $21,060 Beth is ahead? It will take Janet 140 months to make up the $21,060 at $151 per month. In other words, before age 77, Beth is ahead of Janet and after age 77, Janet is ahead of Beth.

From a lifestyle perspective, it can be argued that Beth is more likely to enjoy the cashflow from age 60 to 77 a lot more than Janet will enjoy the extra cashflow after the age of 77.

This example is very simplistic. It does not take into account taxes, investment returns or indexing of benefits. Regardless, taking CPP early is simply about getting more money sooner. Waiting just means you have to live longer to make up the lost income.

CPP Sharing

After debating taking CPP early, the next step for Janet is to figure out if she should split her CPP benefits with her husband. Let’s assume Janet takes CPP early and gets the $351 per month. Her total income is quite low and she only pays tax at the 25% marginal tax rate. Will on the other hand, makes $800 per month in CPP and his total income is much higher in the 36% Marginal Tax bracket with $50,000 of annual retirement income. As a result of the sharing, Will’s CPP amount will drop from $800 per month to 575 per month. Janet’s income will increase from $251 per month to $575 per month. The outcome is $225 per month of income will move from being taxed at 32% to being taxed only at 25%

The key to determining if CPP sharing is feasible is to look at whether the higher CPP earner is in a higher marginal tax rate than the lower CPP earner. Remember, it’s not just about the higher income earner making more money but rather whether they are in a higher tax bracket.

CPP remains one of the cornerstones of creating retirement income. Planning ahead will help you to know when to take CPP and whether to split benefits with a spouse are key issues.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites and Clearpoint Benefit Solutions.

39 Responses to Two conundrums of Canada Pension Plan

  1. Hello Jim,
    I am will be 60 in 2011, and currently working full time. I am collecting survivor benefits from CPP, gross $417 monthly. As I understand, if I take CPP early at age 60, I would be no worse off, as I believe the survivor benefit would be added to the (reduced) 70% of CPP I would be entitled to. That said, I would still hit the maximum CPP. Is my understanding correct?
    Thank you.

    • If I understand correctly, yes. My understanding is that your CPP plus the survivors benefit cannot exceed the maximum. I would encourage you to verify this with Service Canada.

    • Barry
      The calculation of a combined CPP survivor/retirement benefit can be quite complex. Did you ever get the information you needed to make this decision, or do you still want some calculations done?

  2. i was away for 7 years, i just moved back to canada last week, am i eligible to apply for cpp. i worked here for 19 years.

    • Arolf
      Your temporary absence from Canada would have no impact on your eligibility for a CPP retirement benefit. You are eligible if you are age 60 or older, and have made at least one contribution to CPP.

  3. Dear Jim :

    I would like to know how much is the surviours benefit and in order to qualify early pention what is the lenght of the early pention do they take from the year or the term of the pention.

    I am very upset because l have to eye injections that are costing $ 300.00 per injection is there a coverage that l can get to fill out l am 63 and after 65 l don’t have to pay

    can you help me please


    • Have you tried calling Service Canada? I really think that is your best bet for this kind of information. Toll-Free: 1-800-277-9914

      Sorry to hear about the eye injections. Coverage for the eye injections depends on the province you are in and the level of health care coverage you have.

      Good luck

  4. Jim
    Here’s another conundrum regarding CPP benefits!

    I’m writing to warn yourself and your readers, about a CPP issue that has affected me and affects about 4,000 other divorced/separated male contributors each year. The issue is how the Division of Unadjusted Pensionable Earnings (DUPE aka Credit Split) functions when there were children involved in the relationship.
    The DUPE equally shares the CPP earnings (UPE), but does nothing to acknowledge the value of what is known as the Child Rearing Dropout (CRDO). The net result in my case is that my CPP retirement pension estimate at age 65 decreased by about $190/mthly as a result of an 18-year DUPE, whereas my ex-wife’s CPP retirement calculation only increased by about $70/mthly. The reason is that she is able to drop out about 10.5 years under the CRDO provision if those years are less than her “average lifetime earnings”, which is the case for her both before and after the DUPE. I, on the other hand, am stuck with 1/2 max earnings for the 18-year period, only 7-8 of which I can drop out under the general 15-17% dropout provision.
    I am currently appealing this situation at the Federal Court level, and would be glad to hear from others that are affected by this situation.

  5. I believe that CPP pension income is NOT eligible for pension income splitting between spouses, according to CRA rules. Please advise.

    • You are right that CPP is not eligible for pension income splitting on the tax return. However, you can apply to Service Canada to share your CPP.

  6. Hi …I appreciate the information, and am trying to follow the date of the article closely, to decide if taking the earlier or later CPP benefit … I don’t know enough to decide if the rules have already changed or will change soon … the article still shows up well in searches so maybe the other Jim will want to keep the update current … Thanks … Jim

  7. My aunt, who is 60, was laid off from a factory job over 3 years ago. She and my uncle, who is 58, live off of his ODSP income, which he has had for many years. Within the last 18 months he has been diagnosed with early onset Alzheimer’s and is not able to be alone for more than 2 hrs at a time. They own their home, but still carry a mortgage. Their mortgage and utilities total $650/month. Our concern is what will happen to my aunt if my uncle requires long term care before she turns 65 and is able to collect her CPP and OAS benefits. If his income goes to the long term care home and my aunt takes her CPP early, what happens if she can`t cover basic shelter expenses with the CPP payment? Is there help for her somewhere?

      • Steve

        What is the basis of your answer? If the aunt is under age 65, she may or may not qualify for the Allowance while the uncle receives GIS, but the amount would be the same if they’re living together as if the uncle is in a nursing home. In that situation GIS doesn’t make up any difference?

  8. Donsmum13 I hope you get an answer soon.
    I have a survivors pension and applied for early CPP, which was okayed. I see the month after my 60th b-day what was deposited is exactly the same. Should it not have been mailed to me what to expect?

  9. It’s an abomination the way Canada’s seniors and retirees are treated by our government. We pay into a plan that is mandatory our whole life to be eligible for a maximum of $980.00? What is that? And better yet, if we keep working, our pensions are deducted dollar for dollar. I know I’m wasting my time expressing this concern. However, I feel better that I did. Thank God for the employers still willing to pay cash under the table. As we certainly won’t be looked after by our government. Oh, and, why do government officials receive nice fat life pensions for only a few years (if that) service? Whatever!

    • Mark
      Assuming that you’re talking about CPP, we are now contributing 4.95% of our employment earnings annually, and each year of contributions is worth about 0.625% towards our future CPP retirement pension. Not a bad return in my mind, especially when you consider that it also includes protection in the event of disability and/or death.
      I haven’t got a clue what you’re talking about when you say that our pensions are deducted dollar for dollar if you continue working??? CPP benefits are taxable, but there is no reduction based on subsequent earnings. What are you smoking?

  10. My husband died in Nov. 2011 and I am going to begin CPP at age 60 in 3 months. If I earned more than my husband, would pension splitting benefit me as he is obviously not going to be receiving CPP due to his death? We divorced in 2006.

  11. Deb
    If you earned more than your ex-husband for most of your marriage, not only would credit splitting not benefit you, it might reduce your CPP retirement pension.
    The only way to know for sure would be to do compare your CPP benefit calculation now, to what it would be after a credit split. To do that accurately, you would need your CPP statement of contributions, as well as your ex-husband’s (or a very good estimate of his year-by-year earnings) at least for the period of time that you lived together.
    So, if you feel comfortable that you generally had more earnings than him, do nothing!
    The only other issue would be if he had another common-law or legal spouse after your divorce. In that situation, that person could apply for a credit split on behalf of his estate, as it might increase the amount of any death or survivor’s benefit.

  12. My wife and I both turn 60 next year and are trying to come to a decision on whether to apply for CP now or wait until we are 65. I am already retired and my wife will retire next year. We think we will be able to manage initially without the CP using my wife’s employer pension plan and our RSP savings.

    One of my questions is regarding the CPP benefit calculation and low income years used. I understand that a number of low income years are ignored to determine the CPP benefit. If we decide to wait until age 65 to collect CPP will the 5 years of zero income between age 60 and 65 be included in the benefit calculation? Is this something that should help determining whether to take CPP at 60 or not enough to worry about?


    • Nick

      I could give you a better answer if I could see your entire CPP contributory earnings records.

      For now though, these extra five years of zero earnings won’t reduce your age-65 pension IF you don’t have more than 3 other years of low income, and they will reduce your age-65 pension if you do. It gets a little more complicated for your wife, if she took any time off work to raise children under age 7.

      If you want me to do some detailed calculations for you (for a fee), email me at [email protected]

  13. I would like to my husband died in 2009 and he was the one who worked and I only did part time. I have now been on disability for about 3yrs now as I had a injury at work. When my husband died I got his survivors benefit plus my disability. What I don’t understand is why they take money off of my disability. I cant live on 895.00 per month because they are taking the 502.00 in his survivors benefit off of me that extra money they are taking off of me I cant live on. How to they expect people to pay rent utilities and food on that amount of money, I now have to live with my children and I still cant live on that amount. Is there any other way I can get more money to live on. I am depressed as we have paid into things and they take money off which we should be entitled to.

    • Tammy

      I’m sorry to hear of the struggles that you’re having, but something doesn’t sound right about the CPP amounts that you’re describing.

      There is a complex formula that applies when you’re eligible for both a disability and a survivor’s pension, but that shouldn’t reduce your survivor’s pension by $502 if your remaining pension is just $895.

      Also, if your children are still under age 18 or under 25 and attending school, you could be receiving $461.44 for each of them. Are you receiving that?

      You can email me at [email protected] if you want me to do an audit of your CPP benefits to make sure that you’re receiving everything that you’re entitled to. I will only charge you if I find extra benefits for you.

  14. I’m turning 65 and my wife whom does not live with me for 5 years (63); is my wife allowed to forcefully get half of my CPP money. Neither one of us makes enough money to pay income tax. Ephrai Jean Chiasso.

  15. Ephraim

    Once you have been separated from your wife for more than a year, she can apply for a CPP credit split. The result is that your combined earnings for the period of time that you lived together would be shared equally between the two of you.

    That means that you could lose up to half of your CPP only if you were living together for every year that you contributed to CPP.

    • Cliff

      You’re friend is 100% correct. The restriction to have “wholly or substantially ceased employment” in order to receive a CPP retirement pension was removed in 2012.

      At the same time however, the reduction for taking it early was increased from 0.5% to 0.6% per month, in a gradual transition that has the reduction pegged at 0.56% for 2014, 0.58% for 2015 and 0.6% for 2016 and beyond.

      Another change that happened at the same time, is that if work after you start receiving your CPP retirement pension, you must still contribute to CPP if you’re under age 65 and you may still contribute from age 65 to 70.

      Any such additional contributions won’t affect the amount of your regular CPP retirement pension, but they will earn you “post-retirement benefits” or PRBs.

      If you want some detailed calculations (for a fee), email me at [email protected]

      • thanks for info , one more queue ?I read some thing, that said had stop working first, for month before I could get CPP or have a reduced income??

  16. In the US, an individual who has no Social Security benefit or a low benefit due to low earning’s history has the ability to file for a “spousal benefit” on their spouse’s work record. This benefit is 50% of the worker’s benefit. Does the CPP offer something similar?

  17. Mike

    No, the CPP doesn’t offer anything like that at all. However, the Old Age Security (OAS) program does offer an income-tested benefit called the Guaranteed Income Supplement (GIS)which may provide some coverage in this situation.

    • Peter – I’m a little bit confused by your question. If CPP means a CPP retirement pension and CPPD means a CPP disability pension, you can’t possibly be receiving both of those benefits at the same time. You can however, receive a CPP survivor’s pension at the same time as either a CPP retirement pension or a CPP disability pension, so I think the answer to your question is “Yes”.

  18. My wife turns 65 in june so I have several questions for you. Do they take her off my odsp cheque and give me a single person rate and then still take off her income or if not what exactly does happen?

  19. I am still working and have been at my Company for 17 yrs but only paying into the pension plan for 13 of those yrs as I was contract before. I was unable to contribute very little into my plan and it is a Defined Contribution Pen plan. I am 59 now and plan to work as long as my body allows me and the company keeps me. Right now I only have about 11,000 in there. Also I was a stay at home mom for quite a few yrs before so I am worried I will not get much from CPP. I would imagine in my situation I am better off to keep working and not take my CPP at 60? Also I am single (divorced) pretty worried I am not going to be able to survive. Also I just started a TFSA only 60 per mth.

  20. I will be 62 in the fall and am looking to start collecting my CPP in the next month or so. I’m still working. When filing out the application I’m asked whether I’d like to voluntarily have tax deducted from my monthly CPP cheque. I would like to have some tax deducted so that year end tax repayment is not too much. What % of tax should I have taken off my CPP?

  21. I am turning 60 this July and I have applied for my CPP. I would like to know how much tax I should withhold on my payments. This will increase my income by approx. 5880.00 per year.

    Thank you


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