Financial Planning Tips: Important Changes to Canada Pension Plan
View the video here on your mobile device.
This video first ran on November 1, 2011.
Ian Quigley: We podcasted earlier this year on the many changes seen with Canada Pension Plan from legislation that came through about 18 months ago, but starting in 2012, there’s some specific legislation that goes into effect that we should talk about today and that is somebody who’s receiving Canada Pension Plan retirement benefits – they’re getting a pension from CPP – and then they go back to work. Prior to 2012 that person would not contribute any further to CPP because they’re receiving a retirement benefit. This is not an uncommon practice; sometimes people would actually retire on purpose and then go back to work to get out of further CPP contributions. That’s no longer available. As a matter of fact, if you’re between 60 and 65, there’s no planning we can do for you whatsoever. If you’re working and receiving a benefit from CPP, you and your employer have to contribute to the program.
What happens for those between 65 and 70 is the annuitant, the person receiving that CPP pension, has the choice of opting out of CPP. This is important to understand if you are advising small business or you have a small business – being aware that that particular taxpayer has to make some administrative homework if they want to opt out of the CPP. That homework is going to depend on whether they’re employed or self-employed. If they’re employed, it’s not a big deal: there’s a form. It’s called CPT30 and they file this form with CRA. They can do that within a month of turning 65 and it becomes effective the month after they file the form, and then they can opt out of CPP. They can receive the pension benefit without having any further contributions required. If they’re self-employed, they do not file the CPT30 form but they file an election, a schedule 8 with their personal tax return when they’re doing that with the annual system. When they file their personal tax return filling out schedule 8, that gets them out of the requirement to contribute to Canada Pension Plan.
The good news in all of this is if they do contribute to Canada Pension Plan while receiving a benefit, they will see an increase to their pension payout, even if they’re already at the CPP maximum. Unfortunately, most people have taken that pension payout because they don’t want to contribute any further to CPP.
The decision to try and opt out of contributions to CPP, well, that’s pretty obvious. It’s not an inexpensive proposition to be in the CPP system. In 2011, once you’ve earned $48,300, you’ve maxed out what’s called your “pensionable earnings.” You don’t pay anything on the first $3,500 but you do pay 4.95% of your earnings from $3,500 all the way up to $48,300. That’s 4.95% for the employee and 4.95% for the employer. Add all of that up and that’s over $2,000. In 2011, that’s $2,218 for each party; $4,400 total that goes into the CPP. You can understand why somebody between 65 and 70 might want to opt out of further contributions.
That was the big news on CPP that’s going into effect in 2012. There are some other stories worth noting and the biggest one that’s a good follow-up to this one is the phase-in of the penalties for early retirement. There’s already a penalty in place: if you take CPP early, you’re going to take a hit of 0.5% of your pension payout for every month that you take it prior to 65. So, as an example, if you take it at 60, which is the earliest you can take it, that’s 60 months prior to 65 – that’s a 30% hit in your pension payout, which many people do. Starting in 2012, they’re phasing in additional penalties if you take it early and those penalties are going to reach 40% of a reduction if you take it at 60. Starting in 2012, you’re going to see an increase in penalties for taking it early which is always going to cause many people to second-guess whether they really want to take it early or not.
Ian Quigley is a senior consultant with innovative financial advice firm Qube Consulting . He is an expert in investment, insurance and tax strategies and has developed numerous online courses dealing with these subjects. Find Ian’s courses online at ILScorp. All 12 are included in an Annual Life Subscription or are available for individual purchase. Visit ILScorp’s catalog.
