If understanding the Canadian tax code can be mind-numbing. Getting the gist of the Canada Pension Plan’s Post Retirement Benefit program can be equally confusing.
At one time, the rules were relatively simple. If you decided to receive CPP (whether it was early at age 60, or 65 or 69), you stopped making contributions to CPP and your CPP payments were fixed even if you continued to work after turning 60. If you began taking the payments early, say at 60, your payout is reduced by 36 percent for life or a factor of 6.9 percent for every year before you turn 65. If you postpone your payout until age 70, you get a 42 percent bump in the payout you would have received at age 65 or an additional 8.4 percent per year for every year you delay taking your CPP after 65.
Canadians seem to be enamored with taking the money and running because almost two-thirds of us begin taking our benefits before age 65, presumably before we run out of time to spend our money.
Pension reform in 2012 allowed Canadians to take their pension early and continue working at the same time. The catch was that we must continue to pay into CPP. If you are self-employed, you must also pay the employer’s contribution to CPP as well as yours.
Your ongoing contribution funds a Post Retirement Benefit (PRB) that allows you to increase the CPP payout once you begin to receive it. The PRB is usually added to your CPP payout the year after the contribution is made.
Depending on your age, however, the payout has similar reductions for those receiving CPP between 60 and 64 and increases for those 66 to 70.
If you work up to the age of 65, CPP contributions are mandatory. Between the ages of 65 and 70, you can file a request to opt out. After 70, you can no longer make contributions to CPP and your PRB.
The PRB is automatically calculated for you and generally you begin to receive it in April of the following year related to the additional CPP contributions you made the previous year.
You will receive a lump-sum prorated cheque covering the months from January to April of the year you begin to receive your PRB.
So how is the PRB calculated? If you received the maximum pension amount of $1,154.58 per month or $13,854.96 a year, your PRB is 1/40 of that amount or $28.86 per month and $346.32 per year.
Along with your base pension, this amount is indexed for life so it increases modestly every year and is added to previous-year PRB contributions.
Sounds good? Perhaps, but remember that two-thirds of Canadians take out CPP early and pay the penalty, which also applies to the PRB. The actual average CPP payout in Canada in 2019 was not the maximum of $1,154.58 per month but $640 per month, which would amount to a monthly PRB of $16.
Before taking the PRB route we suggest you speak to your tax or accounting specialist to see if this works for you.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: email@example.com or 800-265-1002.