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Published July 27, 2021

What is the Canada Pension Plan (CPP)?

The Canada Pension Plan (CPP) is one of the main sources of retirement income for Canadians. Make sure you are aware of how the CPP works and when you will qualify for benefits.

The Canada Pension Plan (CPP) is a contributory social insurance benefit program designed to help supplement income during retirement. It is intended to replace about one-quarter to one-third of a person’s employment earnings.

This monthly, taxable benefit is available to all Canadians (including self-employed people) over the age of 60 who have worked in any province or territory outside of Quebec and have contributed to the plan. Payment into the program is mandatory.

Note that Canadians who have worked in Quebec are eligible to receive the Quebec Pension Plan, which is similar to the CPP. 

How does the CPP work?

There are two main parts to the program. Paying into the CPP and then eventually receiving CPP benefits.

Contributing to the CPP

In general, all Canadian workers (aside from those in Quebec) over the age of 18 who make more than $3,500 annually are required to contribute a set percentage of their income, up to a designated earnings ceiling, to the CPP. (This chart outlines the contribution rates and maximum pensionable earnings per year.)

Employers must likewise contribute a matching amount annually. Self-employed individuals pay a percentage of their net business income, up to the maximum pensionable earnings cutoff, and must contribute the entire CPP premium as they don’t have an employer to match their payment.

So, for example, according to the chart, in 2021 an employed person would have to contribute a maximum amount of $3,166.45 and their employer would have to contribute an equal amount. A self-employed person would have to contribute a maximum of $6,332.90.

You stop contributing to the Canada Pension Plan once you retire from work or turn 70. If you are 65 or older and still working while receiving CPP benefits, you can also elect to stop contributing to the CPP.

Receiving CPP benefits

Canadians are eligible to receive their full CPP benefits starting in the first month after their 65th birthday. You can also opt to start receiving your benefits as early as age 60, with a penalty of 0.6% for every month before you turn 65, or as late as age 70, with a bonus of 0.7% for every month you delay past age 65.

» MORE: Consider using direct deposit to receive your benefits

If you elect to receive benefits at age 60, your benefits will therefore be permanently reduced by 36%. If you delay benefits until you turn 70, you will in turn receive a permanent increase in benefits of 42%.

The amount of CPP you will receive is based on how long and how much you have contributed to the program, as well as the age at which you opt to start receiving benefits. There is no minimum amount of time you’re required to have worked to receive CPP, however, the amount you’ll get depends on your earnings and how much you contributed overall. If you experienced periods of sporadic or low earnings, not to worry. The government will automatically exclude up to eight years of your lowest earnings when calculating your CPP benefits.

You can log into your My Service Canada Account (MSCA) online to get an estimate of how much you would be eligible to receive. In January of 2021, the average monthly CPP benefit payment was $619.75, and the maximum monthly amount for new recipients at age 65 was $1,203.75. The government also has a handy Canadian Retirement Income Calculator that will help you calculate your CPP earnings.

» MORE: How to use a Registered Retirement Savings Plan

Applying for CPP benefits

CPP payments don’t happen automatically once you turn 65, rather you must apply for the benefits. Though the standard age to receive the CPP is 65, you can start receiving benefits as early as 60 or as late as 70 (see above). There is no benefit in delaying past age 70 because the monthly amount you can receive maxes out at that point.

If you have ever been denied a CPP benefit, live in another country, or have a power of attorney that oversees your CPP account, you must apply for CPP by submitting a paper application form. Otherwise, you can apply online via My Service Canada Account (MSCA), and once you submit your application you’ll get an estimate of what your monthly benefits will be. You should hear back in one to two weeks whether your application has been successful. When applying by paper, however, it can take up to four months to find out if your application has been approved.

» MORE: What is a Registered Retirement Income Fund?

What is the CPP enhancement?

In 2019, the Canadian government decided to gradually increase CPP payments. Originally the CPP was designed to replace about a quarter of a person’s employment earnings. The new enhancement is intended to replace about a third of a person’s average income in retirement. The enhancement is a top-up to the original CPP contribution amount.

From 2019 to 2023, the contribution rate will gradually grow by one per cent (from 4.95% to 5.95%) on the amount of income a person earns between $3,500 and the set earnings limit. In return for making bigger CPP contributions, beneficiaries will receive bigger CPP benefits in retirement. The CPP enhancement affects only those Canadians who work and contribute to the CPP as of January 1, 2019.

» MORE: What is Old Age Security?

Tax considerations

Since the CPP is a taxable benefit, you may want to hold off applying for your CPP until you have stopped working, have a lower overall income and thus fall into a lower tax bracket. You are also allowed to split your pension income with your spouse or common-law partner, which could potentially reduce your taxable income overall and put you in a lower bracket.

What happens to CPP if the beneficiary dies?

If a CPP beneficiary passes away, the government requires that any benefit payments be cancelled. However, a spouse or common-law partner may be eligible to receive a survivor’s pension, with payment amounts depending on their age and whether they are already receiving other CPP benefits. Similarly, a dependent child may be eligible to receive CPP children’s benefits, which is a flat rate ($257.58 per month in 2021). A lump-sum death benefit of $2,500 may also go to the beneficiary’s estate, if eligible.

About the Author

Sandra MacGregor

Sandra MacGregor has been writing about personal finance, investing and credit cards for over a decade. Her work has appeared in a variety of publications like the New York Times, the UK Telegraph, the Washington Post, Forbes.com and the Toronto Star. You can follow her on Twitter at @MacgregorWrites.

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