Retirement Basics in Canada

There has been a bit of confusion recently about payroll deductions that created some heated exchanges in the House of Commons, here in Canada. Namely, conservative leader Pierre Poilievre called CPP and EI “taxes“….when they’re not.

Let’s discuss the 3 main retirement benefits available in Canada in this post, as the majority of Canadians doesn’t have an employer-provided pension.

Canada Pension Plan- CPP-

The Canada Pension Plan – CPP- is a federal program available in all provinces, except Quebec. This province has its own pension plan. All employees and self-employed people are required to contribute to the plan. Employers are required to match the amounts contributed by employees.

If you’re self-employed, Canada Revenue Agency considers you to be both an employee and an employer, meaning you have to contribute double to the CPP.

There is a maximum yearly amount for contributions, just under $3 500 for 2022 – $ 7 000 for the self-employed-.

The earliest you can apply for CPP is at 60 years-old. Note if you apply when you are under 65, your pension will be discounted. On the other hand, if you apply after turning 65, your pension will increase, up to when you turn 70.

The amount one can draw from the plan is based on age at the time of application, the amounts contributed to the plan and the contributory period.

Some periods with zero or little earnings will be dropped under the “drop-out provision”. If you had children and stayed home to raise them, these periods can also be dropped under the “child-rearing provision”.

The average monthly amount is about $725.00. The maximum current amount is just over $ 1 200 per month, at the time of writing. The CPP is indexed to inflation.

The CPP is meant to replace 25% of one’s income. It’s set to increase to 30% with mandatory contributions increasing accordingly.

Old Age Security -OAS-

Old Age Security -OAS- is not linked to the CPP contributions. This program is funded by the general revenues of the Federal Government, for example income or sales taxes.

The amount you received depends of the number of years you spent in Canada since turning 18, your income and your marital status. If you lived overseas and the country has a social security agreement with Canada, the years spent in that country will be factored-in in the OAS calculations.

The maximum current monthly payment is $ 642.00. To receive the full amount, you need to be 65 and have lived in Canada for 40 years. If you’ve lived less than 40 years in Canada, the amount will be discounted. If you choose to delay your OAS application, the monthly amount will increase until your turn 70.

The OAS is subject to a “means test” and to claw backs. If you exceed a certain threshold of income, you will have to repay some or all of it. OAS is also indexed on inflation.

Guaranteed Income Supplement -GIS-

If you’re 65, receive OAS, are single and earn less than $ 21 000 per year, you are eligible for the Guaranteed Income Supplement -GIS-. The monthly amount is $ 1 024, at the time of writing.

A couple has to earn less than 27K a year to be eligible. The monthly payment is between $ 616.00 and $ 1024.00 depending on the combined income and OAS payments.

You also need to be a resident of Canada to receive the GIS. If you’re not, payments will be suspended after 6 months.

Final Word

As you see, all these amounts are really modest. It is crucial to build our own retirement savings!

The government of Canada has a great little tool to determine how much you will need to retire and how much you will need to save to achieve this.

The tool looks at all possible sources of income: CPP, OAS, RRSP, TFSA and employer pension scheme. I found it interesting and useful.