On May 25, 2009, the Department of Finance released an information paper on proposed changes to the Canada Pension Plan (CPP). The recommendations were made by federal, provincial and territorial Ministers of Finance and are meant to be affordable within the current CPP contribution rate of 9.9%. Questions and comments were permitted until July 31, 2009.
The major changes, the effective dates and the grandfathering provisions are outlined below. Note that these changes are at the proposal stage and have yet to be tabled in Parliament.
Removal of the Work Cessation Test
Currently, in order to take CPP before age 65, an individual must either stop work or reduce earnings for at least 2 months. The proposed change would eliminate this condition.
Increase in the general low earnings drop-out
The CPP benefit is calculated as 25% of an individual’s average career earnings starting at age 18 and ending at the age of CPP take-up. The average of earnings is calculated by allowing for the elimination of 15% of the years in which earnings are low or nil. For example, if an individual begins to collect at age 60, this represents a 42 year period. Therefore, 6.3 years of low or nil earnings could be eliminated. The percentages will be increased to 16% in 2012 and 17% in 2014.
Payment of CPP premiums
Currently, individuals who start to collect CPP are not required to pay premiums. It is proposed that individuals will be required to pay premiums if they continue to work and are under 65. This will be voluntary for anyone 65 or older. These contributions will result in increased benefits, even for those who are already receiving the maximum benefits.
Calculation of the benefit for early and late take-up
Currently, when CPP benefits are taken early, those benefits are reduced by .5% per month. Thus, an individual who applies at age 60 will see his or her benefits reduced by 30%. Conversely, for every month after age 65 and before age 70, the benefits will be increased .5% up to 30%. It is proposed to reduce early payout by .6% and increase late payouts to .7% per month.
For further information please contact your Collins Barrow advisor.
Dave Gardner, CA, CPA, is a Tax Partner with the Windsor office of Collins Barrow.
Related content
