What is CPP and how is it calculated?

On February 12, 2020, Logan Wealth Management kicked off its 2020 webinar series with guest presenter, Marlene C. Buxton BA, CFP®, CLU®.  Marlene is the principal Fee-Only Financial Planner of Buxton Financial Inc. This presentation was entitled: Should you take CPP and OAS as soon as it’s available?  A Video of this webinar can be found here.

PART 2 OF 3

What is CPP and how is it calculated?  Where do CPP contributions come from?  How does CPP sharing (splitting) between spouses’ work?

What is CPP?

The Canada Pension Plan is a mandatory government pension plan based on contributions.  It is designed to replace 25% of your income up to the Yearly Maximum Pensionable Earning (YMPE).  The YMPE for 2020 is $58,700.

Key attributes of CPP are:

  • it is a taxable benefit
  • couples may opt to share (split) CPP benefits
  • it is indexed and paid for life

Calculating CPP

There is a formula for calculating CPP that takes into account contributions you have made to it, and the number of years you have been in the plan after age 18.  The maximum pension for 2020 is $1,175.83 per month.

In order to compensate for years of lower income-earning years, such as when one is starting a career, it is permitted to drop up to 17% (8 years) of contributions from the calculation.  This helps increase the average contributions on which your CPP is based, thereby increasing your monthly benefit.

Another provision allows one care-giving parent to drop from the calculation the years when they have a child under the age of 7.

CPP contributions

50% of the contributions to the plan come from the employer, and 50% come from the employee.

If you are self-employed, you have to pay both portions, employer and employee, but 50% of the total is deductible as a business expense.

The amount of contribution for 2020 is $2,898 ($5,796 for a self-employed person).

CPP sharing (splitting) between spouses

CPP Sharing is not the same thing as Income Splitting.  CPP has its own system for sharing that is done separately from your taxes.

CPP Sharing is based on how many years you and your spouse have been living together.  If you are both 60 years of age or older, and you both apply for CPP benefits, the years you have been living together can be split 50/50, regardless of how much each spouse contributed, or only one spouse contributed.

When you split CPP funds they go directly to the recipient spouse.  It actually becomes their money and is taxable to them.

Pension sharing can be stopped if both spouses agree to end it.  It also automatically ends upon separation, divorce or death.  The amounts then revert back to the original allocations.

In the case of separation or divorce, either party can make an application to Credit Split.  Again, the credits can be split for the timeframe you were married or living together.  This option may be important for someone who was earning much less than their spouse during the time they were together.   

CPP has a taxable death benefit calculated as six months of your retirement benefits up to a maximum of $2,500.  This amount is not indexed and hasn’t been changed for many years.

Other benefits include a survivor benefit, child benefits and a disability benefit.  The survivor benefit can be paid with a retirement benefit, but only up to the maximum retirement benefit amount.  This is something to consider when deciding when to take CPP; if you both waited or delayed taking CPP and you’re both at the maximum, there would be no survivor benefit owing.

Post-retirement benefits cannot be shared.  These are contributions made after you start receiving CPP, but you continue to work.

You must contribute to CPP while working between ages 60 and under 65.  Contributions are optional for people working between 65 and under 70.  Contributions are stopped at age 70.

What to expect in Part 3 of this webinar blog

In the third part of this webinar blog we’ll look at:

Important changes to CPP between 2012 and 2016, an important change to OAS, how to calculate CPP benefits and, variables and strategies to consider when deciding when to start taking CPP and OAS benefits

Disclaimer: Please note that the information presented here is intended as general information only.  It reflects the thoughts and opinions of Logan Wealth Management and should not be construed as investment advice. Please consult your adviser to determine whether this information is applicable to your personal situation.