Early Retirement in Canada

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A relative of mine will be officially retiring December 1, 2005 as “Early Retirement” due to health reasons, among other reasons. This person will turn 65 in calendar year 2006. I thought I would write an article about CPP Retirement and its benefits and some other information that might be useful to you, especially if you are approaching the early retirement age of 60.

Canada Pension Plan Retirement Benefits

Everyone is eligible to receive Canada Pension Plan (CPP) benefits when they retire provided that they make at least one contribution to the Canada Pension Plan during their work career. This is a government retirement income plan that is paid, but you contributed to it. This would have been as a deduction off of your salary or your regular paycheque over the years. In addition to your contribution, your employer would match your amount and contribute the same amount to your plan. For this, they would be able to deduct that amount as an expense in their business and consider it to be another cost of having employees.

If you were self-employed, either as a sole proprietorship or in a partnership, you must have filed your income tax return with an additional amount owing because you were the employer – meaning, you had to match your own CPP contribution payment that was due. Normally, this amount wasn’t due or calculated until you filed your tax return and sometimes is a shock for self-employed individuals because it wasn’t deducted over the course of the year, and you will have to cough up this amount in one lump sum included in your balance owing (or refund).

By the way …

CPP rate for 2005

Employee contribution rate is 4.95% of pensionable earnings
Maximum pensionable earnings are $41,100
Basic yearly exemption is $3,500
Maximum employee contribution is $1861.20

Note
The annual maximum for pensionable earnings ($41,100 for 2005) applies to each job the employee holds with different employers (different business numbers). If an employee leaves one employer during the year to start work with another employer, the new employer also has to deduct CPP contributions without taking into account what was paid by the previous employer. This is the case even if the employee has paid the maximum premium amount during the previous employment.

In this situation, any overpayments will be refunded to employees when they file their income tax and benefit returns. Employers are not entitled to a refund.

This means, if you make more than $41,100 NET Income for 2005, you will be required to pay CPP of $1,861.20 for yourself. If you are self-employed, you have to MATCH IT, or pay a combined amount of $1,861.20 x 2 = $3,722.40 extra .. over and above any income tax you will owe on your earnings.

Anyway, assuming that you have paid CPP in your work life, you are entitled to full, unreduced retirement benefits at the age of 65 .. so let’s move on.

Early Retirement

This is the important part:

To be eligible for early retirement, you must stop working altogether, and not earn more than a specific amount of income in the month BEFORE and the month DURING that you apply for your benefits. You have to be at least 60 years of age to be eligible for early retirement.

Once you have been qualified to receive your early Canada Pension Plan benefits, whether its in early retirement or when you turn age 65, you will continue to receive it for the rest of your life. You can earn money afterwords and even return to the workforce full-time, and receive another paycheque. There will not be any CPP deductions though, if you are over age 65 or on early retirement.

How is CPP Calculated?

I’m not really sure. It’s been hinted throughout my years of employment in a public practice chartered accountancy firm, and from my experience dealing with Canada Revenue Agency and searching their websites, that the general goal is to approximately generate almost 25% of your average lifelong workforce income you earned. The catch is, that they don’t actually include your lifelong workforce CPP contributions that you made over the years. There is some complicated formula that takes your average contribution during the years and eliminates your below-average contributions during the years, in case you were not working, had children, took sabbatical etc.

For planning purposes, one strategy I tend to recommend for my clients, is that I would consciously choose remuneration options that pays the owners or shareholders of small businesses at least the amount of salary that will cause them to reach the maximum CPP deduction limit – in the last three to five years before they plan to retire – for instance, in 2005 at least $41,100 gross. This does tend to result in higher CPP monthly benefits when they finally do retire. How do I know? Well, Canada Revenue Agency sends out your estimated CPP benefit estimate that you will receive when you retire practically every year or two. The figures are at the bottom right side of the report. You can also see these contributions online now .. How much will it increase it? .. The extra amount added to your monthly cheques might not be that significant, but could add up over the years or if you are on a fixed budget after retirement.

Click here if you want to read some General Information About The Canada Pension Plan ..

Some final words about Canada Pension Plan Benefits … Retirement and Early Retirement …

* You should probably be applying for either your REGULAR retirement at age 65 or anytime for EARLY retirement after age 60 … at least SIX (6) months prior to the date that you want to start collecting your benefits.

* Just because you turn 65 does not mean you will automatically get CPP. You must still apply.

* If you don’t apply at age 65 for CPP and still are in the workforce, you may contribute CPP off of your paycheque.

* For every year AFTER age 65 that you delay applying and collecting your CPP retirement benefits, they will ADD 3% extra each year (0.25% per month)

>> UPDATE:Refer to Comments: According to CRA it is also 6% each year after age 65 if you delay applying, or 0.5% per month add-on.

* For every year BEFORE age 65 that you apply for Early Retirement, they will DEDUCT 6% each year (or 0.5% per month)

* No – your CPP Benefits do not go up at age 65 after taking the reduced rate and Early Retirement

* You cannot apply for Early CPP Retirement benefits before Age 60.

* You must begin to collect your CPP Retirement benfits at age 70 and are not allowed to contribute any more to your plan

* You will receive a slip for all monies received as a T4(A)P, which is income and you will be taxed on the gross amount you receive. If they determine that a portion should be withheld for tax, it will show up as Tax Paid on your slip and will turn into a prepayment or instalment on your income tax return.

* If you need information about your account, you can either go to http://www.cra-arc.gc.ca/eservices/tax/individuals/myaccount/menu-e.html (My Account at CRA) or call them at 1-800-959-8281 and speak to a real person. This is YOUR retirement.

Don’t take it from me .. if you have any further questions, be sure to discuss this with your accountant and tax preparer. (That’s my disclaimer). If they can’t help you, or you feel you are not getting all the information you want or they are unable to answer your questions .. consider getting another accountant and tax preparer. This is YOUR retirement.

Take care.
HART

Comments

John Skelton says:

This statement:
“For every year AFTER age 65 that you delay applying and collecting your CPP retirement benefits, they will ADD 3% extra each year (0.25% per month)”
is contrary to everything else I have read on this specific topic. According to my understanding, if delayed beyond age 65, the CPP benefit increases by 0.5% per month to a maximum of 30% (60 mo. x 0.5%) by age 70. This is double the amount you have stated.

HART says:

Hmm. That is strange .. You are correct John Skelton. I don’t recall where I got my information. However, doing a quick Net search, I see this correctly or indirectly on the CRA website where it says 6% before AND after .. i.e. HERE: http://www.sdc.gc.ca/asp/gateway.asp?hr=en/isp/pub/factsheets/retire.shtml&hs=cpr

I see other quotes like what I place above in sites that suggest 6% before and 3% after age 65 .. HERE: http://www.caatpension.on.ca/Atrium/Planet/April_2004/Apr_2004.html

Bottom Line – you shouldn’t be waiting until after you are 65 to collect – but it’s your right – and your pension.

Thanks for correcting me!

rene dohan says:

I am thinking to stop working in two years .I am 55 years old now .I know i am no eligible to apply for yearly retirement pension till I am 60 . I have contribution of CCP etc now for last 12 year at least from my present employer .It is possible to stop work when I 57 years old and when I am 60 i can apply for yearly official retirement benefit ? Or I have to work till 60 of age to be able to get yearly retirement benefit .Please would you able to advice me I have no any knowledge about retirement benefit etc .Thanks Lots Rene Vancouver

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