31 Mar 2015

Canada Pension Plan: CPP – Start Now OR Later?

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Introduction

One of the more difficult decisions for those approaching retirement is when to commence to receiving your CPP retirement pension. In this brief article, we will examine a number of considerations that must be weighed to make that decision.

Starting Your CPP Early

You can elect to begin receiving your CPP retirement pension as early as age 60 – however there is a penalty of 0.6% for each month the pension starts before your 65th birthday.  Those who start at age 60 will suffer a reduction of 36% of their pension entitlement.  Thus, if your Statement of Contributions from Service Canada shows that you would be entitled to a $1,000 per month pension at age 65, your pension will only be $640 per month if you start at age 60.  If you continue to work after you receive your pension, you must still continue to contribute to CPP until age 65.  After you reach 65, you can opt out of contributing if you’re already receiving your pension.  On the positive side, those extra contributions will earn you a small additional pension called a post-retirement benefit.

Delaying Your CPP

If you delay starting your pension beyond your 65th birthday, you’ll receive a substantially larger monthly benefit.  Your pension will be increased by 0.7% for each month you delay – for up to 60 months.  If you delay until your 70th birthday, your pension will be increased by 42%.  For example, if you were entitled to a $1,000 per month pension at age 65, and you delay until age 70, your pension will be $1,420 per month.  On the down side, you’ll have to continue contributing to age 70 if you continue to work.  Those extra contributions will earn you an additional post-retirement benefit.

How Long Will You Live?

Perhaps one of the most difficult question to answer is “How long will I live?”  The longer you live, the longer you’ll receive your pension and therefore the more you’ll get from CPP.  A general rule of thumb is that if you’ll live beyond age 74, you will benefit from delaying the start of CPP.  If you live to age 80 or beyond you’ll get more from CPP if you delay starting to age 70.  The average Canadian who makes it to age 65 will live to about age 85.

Death

When you die, the maximum death benefit from CPP is $2,500.  If you have a spouse, they will be entitled to a survivor pension of 60% of the deceased taxpayer’s pension entitlement.

CPP Pension Limits

The maximum CPP retirement pension for 2015 is $1,065 per month (excluding any post-retirement benefit and increase for delaying).  That maximum includes both the taxpayer’s own CPP retirement pension and any survivor pension that they are entitled to.  This means that where both spouses have CPP pension entitlement, the amount of the survivor pension may be reduced or even eliminated.

Conclusion

The “in’s” and “out’s” of the Canada Pension Plan can be complex. Owner managers of their own privately owned corporations have a great deal of flexibility in maximizing their Canada Pension plan contributions

Joe Truscott has been practicing as a Chartered Professional Accountant for over 30 years and advising business owner in structuring their affairs to MAXIMIZE their income while MINIMIZING their personal and corporate income taxes payable

The current annual Canada Pension plan contribution for employers is $5,260.50 ($2,630.25 employee contributions and $2,630.25 employer contributions) and careful consideration must be made to MINIMIZE your contributions while MAXIMIZING your Canada Pension Plan entitlements.

Owners of privately owned corporations have other tax planning options and opportunities of minimizing their CPP contributions while still obtaining a significant annual retirement income. Annual Canada Pension Plan contributions of say $4,500.00 per year for 20 years amount to over $38,000 of total contributions over this period, which is a significant amount of funds.

If you would like to engage Joe Truscott with respect to the above CPP matters or any other personal or corporate income tax matters, please contact Joseph A. Truscott, Chartered Accountant at (905) 528-0234, Ext: 224 or e-mail Joe at joetruscott@josephtruscott.com.

March 2015

This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Joseph A. Truscott, Chartered Accountant or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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