What is the Canada Pension Plan?

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The Canada Pension Plan (CPP) is a social insurance program in Canada that provides financial assistance to eligible individuals during their retirement years. CPP is designed to provide a stable source of income to help Canadians maintain a basic standard of living after they stop working. The CPP is one of the pillars of Canada's retirement income system, along with Old Age Security (OAS) and personal savings. You can use a Canada Pension Plan (CPP) Calculator to approximate your CPP pension.

CPP was created in 1965 by Pearson’s government and belongs to all working Canadians except residents of Quebec. It is administered by Employment and Social Development Canada. The province of Quebec opted out of CPP in 1965 and created an equivalent plan called the Quebec Pension Plan. Any province may create a plan to substitute or complement CPP.

Canada’s constitution (section 94A) states that: “The Parliament of Canada may make laws in relation to old age pensions and supplementary benefits, including survivors’ and disability benefits irrespective of age, but no such law shall affect the operation of any law present or future of a provincial legislature in relation to any such matter.”

Thus, the constitution considers authority over pensions as shared between the federal and provincial governments. So, any significant change to CPP requires the approval of at least seven provinces, which contain at least two-thirds of Canada’s population.

CPP is contributory, meaning that most individuals who work in Canada and earn income must contribute to the CPP. Employees, their employers and self-employed individuals should all make CPP contributions. Contributions are made throughout a person's working years. Everyone over 18 and under 60 is legally required to participate in CPP. Individuals between 60 and 70 may choose to participate as well. Their employer precisely matches every individual’s contribution to CPP. Self-employed individuals must pay both the employee and employer contributions themselves.

Both employees and employers contribute a set percentage of the employee's earnings (up to a specified maximum) to the CPP. The contribution rates may change over time based on economic factors and government decisions. Employers are required to match the contribution of their employees to CPP. Self-employed individuals shall make contributions double the amount of employee contributions, i.e. both the employee and employer contributions.

The primary CPP benefit is the monthly retirement pension. Anyone over the age of 60 who has contributed to CPP is eligible to apply and receive the retirement pension. The amount of CPP benefits an individual can receive is based on their contributions to the plan during their working years. The CPP uses a formula to calculate the average earnings and then determines the monthly retirement benefit amount.

The monthly retirement pension is a quarter of the average pensionable earnings of the recipient in constant dollars if they start receiving a CPP pension at the age of 65. The sooner you start receiving your pension, the smaller your monthly benefit will be; the later you begin receiving your pension, the larger your monthly benefit will be.

CPP retirement benefits can start as early as age 60 or be delayed until age 70. The longer you wait to receive benefits, the higher your monthly payment will be. The standard age to begin receiving CPP retirement benefits is 65. Your benefit is reduced by 0.6% each month if you take your benefit earlier than the age of 65. Your benefit is increased by 0.7% each month you postpone receiving your benefit after the age of 65.

When you want to receive your retirement benefit, you need to apply well in advance. You can apply online through your MyServiceCanada account or fill out the Application for a Canada Pension Plan Retirement Pension and mail it to the nearest Service Canada Office. One can expect processing a complete application submitted online to take one month. In contrast, complete applications submitted by mail or at Service Canada locations can take four months to be processed.

The CPP also provides survivor benefits to the surviving spouse or common-law partner of a deceased contributor and disability benefits to individuals who cannot work due to a severe and prolonged disability.

If a survivor of a deceased CPP contributor is 65 or older and is not receiving other CPP benefits, they will receive 60% of the contributor’s retirement pension. If a survivor of a deceased CPP contributor is younger than 65, they will receive 37.5% of the contributor’s pension and a flat rate portion.

You must have made contributions over a certain period (at least one contribution). This period is often referred to as the "contributory period." The longer the contributory period, the greater your retirement benefit.

The CPP is portable, meaning your contributions and benefits remain with you if you move to another Canadian province or territory. When you become eligible to receive a CPP pension, where you live does not matter. You can apply for and receive your CPP benefit from anywhere.

If you have only worked in Quebec, you have contributed to the Quebec Pension Plan (QPP) and will receive QPP benefits instead of CPP benefits. If you have worked both in Quebec and another part of Canada, you have contributed both to QPP and CPP. You will receive either QPP or CPP depending on whether you live in Quebec or another province when applying for your benefit. CPP and QPP are very similar social insurance programs with very similar benefits.

CPP benefits are considered taxable income, meaning that individuals receiving them may need to pay income tax on them.

CPP enhancement includes the first additional component, which was phased in between 2019 and 2023 and the second additional component, which will be phased in between 2024 and 2025. CCP Enhancement would bring the pension benefit up to 33% of the workers' average pensionable earnings in constant dollars (your average earnings are adjusted because inflation is eating away the purchasing power of dollars). After you start receiving your pension, your payment will increase yearly, proportional to the Consumer Price Index (CPI) for All Items increase.

If you continue to work and contribute to CPP after you start receiving your pension, you become eligible for an increase in your monthly allowance called “Post Retirement Benefit (PRB).” Each year of contribution, after you begin receiving a CPP pension, would automatically increase your monthly benefit from the following year. You can choose to stop contributing to CPP anytime at or after the age of 65. You cannot contribute to CPP when you reach 70.

CPPIB professionally manages the CPP fund and reports to federal and provincial governments. CPPIB emphasizes long-term benefit security, focus on quality, commitment to sustainability and commitment to responsible investment.

CPPIB is a crown corporation created by the Canada Pension Plan Investment Board Act and operates at arm's length from the Government of Canada. CPPIB’s investment mandate is to achieve the maximum rate of return without undue risk of loss. It was established in 1997 as part of the Canadian government's efforts to make CPP sustainable. CPPIB has $575 billion in assets under management. In 1999, CPPIB established the CPP reserved fund to hold investment earnings and CPP contributions not needed for paying current pensions.

Old Age Security (OAS) in Canada is a government-administered pension program designed to provide financial support to eligible senior citizens during their retirement years. It is one of the cornerstones of Canada's retirement income system and aims to help seniors maintain a basic standard of living after they stop working.

Key points about Old Age Security in Canada include:

Eligibility:

To be eligible for Old Age Security benefits, you must be a Canadian citizen or legal resident who has lived in Canada for ten years after age 18. You must also meet specific age requirements, which are gradually increasing. The standard age of eligibility is 65. However, you can delay receiving benefits until age 70 for increased payments. Those who lived in Canada for less than 10 years can receive a partial benefit based on how long they have lived in Canada.

Benefit Amount:

The Old Age Security (OAS) benefit is a monthly payment that is indexed to inflation. OAS is reviewed every quarter (4 times per year). If the average CPI has increased compared with the last quarter, the OAS payment will rise by the same factor. If the CPI decreases, the payments will stay the same. The benefit amount can change each year based on the Consumer Price Index. The payment amount is not based on your previous income or contributions; it is a set amount designed to provide a basic level of support.

Clawback:

The Old Age Security benefit may be subject to a clawback if your individual net income exceeds a certain threshold. This means that if your income surpasses the specified limit, you may have to repay a portion of your OAS benefits through a tax on the excess income. This limit can change every year and is $81,761 for 2022. 15% of your income over $81,761 is deducted from the maximum amount of OAS. The maximum amount of OAS is currently $8,251. So, a senior who has received the maximum amount of OAS and is earning $90,000 should return 0.15*($90,000-$81,761) = $185.38.

Guaranteed Income Supplement (GIS):

In addition to the OAS benefit, low-income seniors may also qualify for the Guaranteed Income Supplement, which is an additional monthly payment aimed at providing extra support to those with limited income. The maximum amount for single individuals for the period July to September 2023 is $1,043.45. Those with annual income Less than $21,168 would receive the maximum. For people in a relationship, the maximum amount would depend on whether their partner receives OAS or not. It is either $628.09 or $1,043.45. GIS is only paid to OAS recipients.

Application Process:

You may need to apply for Old Age Security benefits. If Service Canada has enough information on your file to determine your eligibility and the amount of your benefit. In this case, you will receive a letter from Service Canada that you will receive an OAS pension. If you do not receive any letter from Service Canada about your OAS by 1 month after turning 64 or if they ask you to apply, you would need to apply to receive OAS. it's recommended to do so several months before you intend to start receiving the benefits. The application process involves providing documentation and information about your eligibility.

A Registered Retirement Savings Account (RRSP) in Canada is a government-regulated, tax-advantaged savings vehicle designed to help individuals save for retirement. It allows Canadians to contribute a portion of their income into the account, where the investments can grow on a tax-deferred basis until withdrawal, typically during retirement. Key points about Registered Retirement Savings Accounts (RRSPs) in Canada include:

Tax Advantages:

Contributions to an RRSP are tax-deductible, meaning the amount you contribute can be subtracted from your annual taxable income. This can result in immediate tax savings, as your reported income for tax purposes is reduced.

Tax-Deferred Growth:

Investments held within an RRSP can grow tax-free until they are withdrawn. This allows your savings to accumulate more over time than investments in a regular taxable account, where you would be subject to annual taxes on gains.

Contribution Limits:

There is a maximum yearly contribution limit for RRSPs, which is a percentage (18%) of your earned income up to a particular ceiling ($30,780)`. The exact limit can change annually. Any contributions made beyond the limit may be subject to penalties.

Investment Options:

RRSPs offer a range of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. This allows you to create a diversified investment portfolio tailored to your risk tolerance and financial goals.

Withdrawals and Taxation:

Withdrawals from an RRSP are considered taxable income in the year when they are withdrawn. This is because you received a tax deduction when you made the contributions. However, RRSPs are primarily designed for retirement savings. Hence, there are penalties for withdrawing funds before retirement age, except for specific circumstances such as the Home Buyers' Plan (HBP) or the Lifelong Learning Plan (LLP).

Spousal RRSP:

A spousal RRSP allows one spouse to contribute to an RRSP in the other spouse's name. This can be advantageous for income splitting in retirement, potentially reducing overall tax liabilities.

Conversion to Registered Retirement Income Fund (RRIF):

By the end of the year, when you turn 71, you must convert your RRSP into a Registered Retirement Income Fund (RRIF) or use the funds to purchase an annuity. This transition allows you to start withdrawing retirement income while still enjoying some tax deferral.

A Tax-Free Savings Account (TFSA) in Canada is a government-regulated financial account that allows individuals to save and invest money without paying taxes on investment earnings or withdrawals. It's designed to provide Canadians with a flexible and tax-efficient way to grow their savings for various financial goals.

Key points about Tax-Free Savings Accounts (TFSAs) in Canada include:

Tax-Free Growth:

Any investment income earned within a TFSA, such as interest, stock dividends, and capital gains, is not subject to taxation. This means you can grow your savings without worrying about annual taxes on your gains.

Contribution Room:

Each year, the Canadian government sets a TFSA contribution limit. Any unused contribution room can be carried forward to future years, allowing you to catch up on contributions if you haven't maximized your TFSA in previous years.

Flexibility:

TFSAs can hold various investments, including savings accounts, guaranteed investment certificates, stocks, bonds, mutual funds, ETFs, and more. This flexibility enables you to tailor your TFSA portfolio to your investment preferences and risk tolerance.

Withdrawals:

You can withdraw money from your TFSA anytime without incurring taxes or penalties. The amount you withdraw is also added back to your contribution room the following year, allowing you to recontribute it if desired.

No Age Limit:

Unlike some other tax shelters, TFSAs do not have age restrictions. You can continue to contribute to your TFSA beyond age 71, which is the age at which you are required to convert other retirement accounts like RRSPs into income-generating vehicles.

Not Tax-Deductible:

Unlike Registered Retirement Savings Accounts (RRSPs), contributions to a TFSA are not tax-deductible. However, the major benefit lies in tax-free growth and tax-free withdrawals.

Accumulated Room:

TFSA contribution room accumulates yearly, even if you do not contribute. This means that if you have not contributed to a TFSA since its inception in 2009, you could potentially have significant unused contribution room.

Real estate investments in Canada involve purchasing, owning, and managing property to generate income and potentially realize capital appreciation. Real estate is a popular investment avenue due to its potential for long-term growth, passive income, and portfolio diversification. There are different types of real estate investments in Canada, including:

Residential Real Estate:

This involves purchasing properties such as houses, condos, or apartments to rent them out to tenants. Rental income can provide a steady cash flow, and property values may appreciate over time.

Commercial Real Estate:

Investing in commercial properties like office buildings, retail spaces, or industrial complexes can offer higher rental income than residential properties. Commercial real estate is often leased to businesses for office or retail use.

Real Estate Investment Trusts (REITs):

REITs are companies that own, manage, or finance income-generating real estate properties. Investors can buy shares in a REIT, allowing them to participate in real estate ventures without directly owning physical properties. Greater diversification can be achieved by investing in REIT ETFs.

Real Estate Syndication:

Syndication involves pooling funds from multiple investors to collectively invest in a real estate project. This could be a development, renovation, or income-generating property. Investors typically earn returns based on the project's success.

Flipping Properties:

Some investors buy properties, renovate or improve them, and then sell or rent them for a profit. An example of such a strategy is “Buy, Rehab, Rent, Refinance and Repeat.” This strategy requires careful consideration of market trends and potential cost analysis to ensure a successful flip.

Land Development:

Investing in undeveloped land with the intention of future development can offer significant potential gains. However, it often involves higher risks and requires zoning regulations and infrastructure planning expertise.

Short Term Rentals:

With the rise of short-term rentals, investing in properties listed on platforms like Airbnb can provide a flexible income stream. Still, it also requires active management and compliance with local regulations.

Student Housing:

Properties located near universities or colleges can be attractive for student housing. Demand from students may provide consistent rental income.