Strategies to Minimize the Old Age Security Claw Back
The Old Age Security (OAS) program is the cornerstone of Canada’s retirement income system. It includes a basic pension that goes to almost all people 65 or older who have lived in Canada for a certain time and is indexed for inflation every January, April, July and October.
How much income to expect
The amount of OAS you receive depends on the number of years you live in Canada after you turn 18. Generally, you receive a full pension (Currently the maximum OAS income is $466.63) if you live in Canada for at least 40 years after age 18. If you live here for less time, you may qualify for a partial pension. With a partial pension, you’ll receive 1/40th of the full pension for each complete year you live in Canada after you turn 18.
If your net individual income is above a set threshold (currently $57,790), your OAS pension will be reduced. This figure is also adjusted each year for inflation. For every dollar ($1.00) of income above the threshold, the amount of basic OAS pension reduces by 15 cents. For example, if your taxable net income was $68,000, then you would be above the clawback threshold by $8210 which in turn would mean that you would lose $1231.50 per year of OAS or $102.63 per month. If you qualified for the maximum OAS, you would be losing 22% of your OAS pension income.
In my conversations with retirees, many are concerned about the OAS clawback. However, according to Human Resource Development Canada, only about five percent of seniors receive reduced OAS pensions, and only two percent lose the entire amount. If you are one of these people who face losing some of the OAS due to clawback, here are some simple strategies to help you minimize the clawback.
1. Defer RRSP income. Eventually, RRSPs must be converted to income. In fact, the latest you can defer an RRSP is December 31 in the year in which you turn 69. For those concerned about the clawback, defer converting RRSPs for as long as you can and then take the minimum withdrawal each year to minimize your net income.
2. Use the younger spouses age. For RRIF planning, if you are trying to keep your income as low as possible to avoid the clawback, make sure you use the younger spouses age to calculate the minimum income. The younger the age, the lower the income.
3. Tax efficient income on non-RRSP investments. When it comes to investment income from non-registered investments, different types of income are taxed differently. Interest income from Guaranteed Income Certificates (GICs) and term deposits are fully taxed. However, dividend income and capital gains enjoy a much lower tax rate. One strategy is to minimize GICs and term deposits, and instead purchase income funds, that have a lower inclusion rate.
4. Use part of your non-registered funds to purchase an annuity. Using part of your non-registered funds to purchase an annuity provides you with a lifetime stream of income. From a tax perspective, only a portion of each payment is taxable because a portion of each payment is considered a return of capital and is therefore tax-free. Only the portion that is interest is taxable.
5. Income splitting. If you have a spouse and you are able to split your income with your spouse, you may be able to reduce your net income. Some examples include CPP splitting, investment income and payments from corporations.
6. Look for all available tax deductions. The goal to reducing clawback is to reduce your income. Ensure that you claim all available deductions for your situation. When in doubt, seek help to see if you are missing some important deductions to lower your income and minimize clawback.
7. Final RRSP contribution. If you are not yet age 69 and have unused RRSP deduction room, make a final RRSP contribution. You don’t have to take your deduction all at once; you can spread it overtime, even beyond age 69. For example, a $40,000 deduction taken over 8 years will reduce your net income by $5,000 each year. Borrow to Invest.
8. Borrow to invest. If you have discretionary income, take an interest-only loan. Loan Interest for investment purposes is fully deductible and you use the discretionary income to pay the interest. The loan interest reduces your net income dollar-for-dollar, and at the end of the loan, you pay the principal on the loan and keep the after-tax investment income. This strategy can increase significantly the value of your estate.
Three Big Changes to OAS (Old Age Security)
On March 29, the Conservative party released their 2012 budget
and the big news is the announced changes to Old Age Security
(OAS). This change was one of the government’s worst secrets as Stephen Harper announced that changes needed to be made to OAS
at the World Economic Forum earlier this year.
What is not changing
There was some suggestions that the government should lower the OAS clawback
threshold which would affect higher income retirees but there will be no changes to the OAS clawback.
Changes to the age of eligibility
The biggest news is the gradual change in the age of eligibility from age 65 to 67. This change will be implemented in 2023.
This means that this change will not affect those Canadians who are 54 or older as of March 31, 2012. Canadians are effectively being given 11-year notice and then 6 years to gradually implement the change.
· If you were born before March 31, 1958, you will not be affected
· If you were born between April 1, 1958, and Jan. 31, 1962 will have an age of eligibility between age 65 and 67. See the chart below for more details:
OAS/GIS Age of Eligibility by Date of BirthMonth of Birth 19581959196019611962Jan.6565 + 5 mo65 + 11 mo66 + 5 mo66 + 11 moFeb. – Mar.6565 + 6 mo6666 + 6 mo67Apr. – May65 + 1 mo65 + 7 mo66 + 1 mo66 + 7 mo67June – July65 + 2 mo65 + 8 mo66 + 2 mo66 + 8 mo67Aug. – Sept.65 + 3 mo65 + 9 mo66 + 3 mo66 + 9 mo67Oct. – Nov.65 + 4 mo65 + 10 mo66 + 4 mo66 + 10 mo67Dec.65 + 5 mo65 + 11 mo66 + 5 mo66 + 11 mo67
Option to defer OAS
Under the new OAS rules, Canadians will also have the option to defer OAS payments for up to 5 years starting July 1, 2013. The increase is what the government calls actuarially neutral which means on average Canadians will receive the same lifetime OAS benefit whether they choose to take it at 65 or as late as 72 after the new eligibility rules are implemented.
This may be particularly important for those who intend to continue working past 65 who would otherwise be subject to recovery (or clawback) of OAS on total income and who wish to reduce their taxable income.
Proactive enrollment for OAS
The Government will also attempt to improve services for seniors by putting in place a proactive enrolment regime that will eliminate the need for many seniors to apply for OAS and GIS. This measure will reduce the burden on seniors of completing application processes and will reduce the Government’s administrative costs. Proactive enrolment will be implemented in a phased-in approach from 2013 to 2015.
Beware of telephone and email scams
Ottawa, Ontario, March 7, 2014... The Canada Revenue Agency (CRA) warns all taxpayers to beware of telephone calls or emails that claim to be from the CRA but are not. These are phishing and other fraudulent scams that could result in identity and financial theft.
People should be especially aware of phishing scams asking for information such as credit card, bank account, and passport numbers. The CRA would never ask for this type information. Some of these scams ask for this personal information directly, and others refer the taxpayer to a Web site resembling the CRA's, where the person is asked to verify their identity by entering personal information. Taxpayers should not click on links included in these emails. Email scams may also contain embedded malicious software that can harm your computer and put your personal information at risk.
Examples of recent telephone scams involve threatening or coercive language to scare individuals into pre-paying fictitious debt to the CRA. These calls should be ignored and reported to the RCMP (see contact information below).
Examples of recent email scams include notifications to taxpayers that they are entitled to a refund of a specific amount, or informing taxpayers that their tax assessment has been verified and they are eligible to receive a tax refund. These emails often have CRA logos or internet links that appear official. Some contain obvious grammar or spelling mistakes.
These types of communication are not from the CRA. If the CRA does contact you by telephone, there are established processes in place to ensure your personal information is protected. Should you wish to verify the authenticity of a CRA telephone number, contact the CRA directly by using the numbers on our Telephone numbers page. For business-related calls, contact 1-800-959-5525 and for individual concerns, contact 1-800-959-8281.
To better equip taxpayers to identify possible scams, the following guidelines should be used:
- NEVER requests information from a taxpayer about a passport, health card, or driver’s license.
- NEVER divulges taxpayer information to another person unless formal authorization is provided by the taxpayer.
- NEVER leaves any personal information on an answering machine or asks taxpayers to leave a message with their personal information on an answering machine.
Whenin doubt, ask yourself the following:
- Am I expecting additional money from the CRA?
- Does this sound too good to be true?
- Is the requester asking for information I would not include with my tax return?
- Is the requester asking for information I know the CRA already has on file for me?
- How did the requester get my email address or telephone number?
- Am I confident I know who is asking for the information?
- Is there a reason that the CRA may be calling? Do I have a tax balance outstanding?
The CRA has strong practices to protect the confidentiality of taxpayer information. The confidence and trust that individuals and businesses have in the CRA is a cornerstone of Canada’s tax system. For more information about security of taxpayer information and other examples of fraudulent communications, go to www.cra.gc.ca/security. Anyone who receives a suspicious communication should immediately report it to email@example.com or to the institution that the communication appears to be from.
Making a payment
.Did you know?
The Canada Revenue Agency (CRA) offers online payment methods that make paying taxes as easy as paying your hydro or phone bill.Payment methods
There are several ways to make a payment to the CRA.
1. Online banking: Use your financial institution’s online banking service and select The Canada Revenue Agency in the list of payees. We may also be listed as:
- Revenue Canada;
- CRA Payment on Filing; or
- Receiver General.
Make sure you correctly identify the type of account, your social insurance number or business number, and the reporting period or tax year of your payment.
1. Debit card: Use My Payment, CRA’s online payment service. It allows individuals and businesses to make payments using Interac® Online. You may qualify to use this method if you have an online banking account with one of the following institutions:
- BMO Bank of Montreal (personal accounts only);
- TD Canada Trust;
- Scotiabank; or
- RBC Royal Bank.
1. In person: You can make your payment in person at your financial institution in Canada. To do this, you will need a personalized remittance voucher, which you can ask for online through My Account or Quick Access.
1. By mail: You can also mail your payment to the CRA. Send your cheque or money order (payable to the Receiver General), along with your remittance voucher, to:
Canada Revenue Agency
875 Heron Road
Ottawa ON K1A 1B1
1. Non-resident payments: You can pay by wire transfer if you are a non-resident who does not have a Canadian bank account.Stay connected
To receive updates when new information is added to our website, you can:
Beware online scams that lock computers for ransom, say RCMP
Nova Scotia RCMP are warning the public about an online scam that targets computer users and holds their computers for a ransom in exchange for money.
The malicious software, known as ransomware, pops up on users' computers and tries to trick them into paying money to have the software removed.
"This type of pop-up goes far beyond being a nuisance and can actually harm your computer," said Cpl. Christian Hochhold of the RCMP technological crime unit.
"If you cannot access anything on the computer beyond the pop-up screen your computer is infected."
The malicious software freezes access to the computer system it infects and then demands a ransom be paid to the creator of the malware in order for the restriction to be removed.
RCMP say in some cases, the ransomware installs itself on the computer and encrypts files on the hard drive, preventing users from accessing their own files.
Once installed, the malicious software prompts a message to appear indicating the files are locked and the data will be lost unless you pay the scammer a sum of money. RCMP say this type of ransomware is very difficult for malware-scanning software to get rid of — however RCMP say people should not cave to the scammers' demands.
"Do not pay the scammers' ransom request. Be sure to frequently backup your important data in case your computer is infected and if it is, have it cleaned to remove any malware," advises Hochhold.
To prevent ransomware attacks, police advise people to:
Have a proper firewall installed on your computer.
Ensure software such as anti-malware, web browser and operating system are up to date.
Be cautious of the websites you visit.
Don't open email attachments unless your trust the source.
Regularly scan your computer for malware.
It may be possible to remove the ransomware yourself following instructions in an online search but it might be necessary to have a professional look at your computer.
The February 11, 2014 federal budget has proposed to eliminate tax benefits of many estates and trusts; one of which is the immigration trust.
Many new immigrants to Canada have relied on the non-resident trust exemption to avoid tax on the trusts' foreign-source income during their first five years in Canada. For this reason these trusts have become known as ‘immigrant trusts’.
Here’s how it worked: where a person resident in Canada has contributed property to a non-resident trust, the Income Tax Act (the Act) has traditionally deemed the non-resident trust to be resident in Canada and subject to Canadian income tax. An exemption for non-resident trusts has previously existed for individual contributors to a non-resident trust who have been resident in Canada for less than 60 months though; Budget 2014 removed this exemption from the Act.
The non-resident trust exemption will be eliminated effective for years ending on or after February 11, 2014. There are a few transitional measures, but they do not provide much relief: the new law will not go into effect until a trust's first taxation year that ends after 2014 if the exemption applies to the trust at any time after 2013 and before February 11, 2014, and no contributions are made to the trust on or after February 11, 2014 and before 2015.
Coupled with other recent changes in citizenship and immigration law, these changes could affect the number of high net-worth individuals seeking to immigrate to Canada.
Adjusting Prior Filed Returns? Be Honest
Morton v. The Queen (2014) TCC 72. The Tax Court of Canada recently released reasons for judgment in a case regarding the imposition of penalties following the expiration of the normal reassessment periods.
The appeal by Mr. Morton was in regard to reassessments for the taxation years 1998-2001. The reassessments were made following his requests for adjustment to his income for those years after the expiration of the normal reassessment periods. The Minister of National Revenue (the Minister) normally has three years to reassess a taxpayer, but taxpayers have ten years to make an adjustment request and any re-determination, when requested by a taxpayer, is discretionary on the part of the Minister.
If the adjustments were made as Mr. Morton submitted, they would have generated refunds in excess of $202,000. But, the adjustments were dubious; they were not supported by any documentation and the facts surrounding them were vague.
During testimony, he admitted that he knew when he made the requests that he did not receive the income nor incur the expenses claimed. He blamed stress related to financial difficulties, marriage breakdown and the loss of access to his business books and records in 2007 and 2008 for the grossly incorrect and unsubstantiated claims.
The Honourable Mr. Justice Randall S. Bocock disagreed with all arguments proffered by the appellant’s counsel, including an argument that the absence of a refund or reassessment reliant upon the request by the taxpayer precludes a penalty under the Income Tax Act (the Act).
Justice Bocock stated that such an argument “lacks entirely an appreciation of this taxpayer’s intention, the intention and expectation of each taxpayer under the Act when filing a T1–Adjustment Request and the plain meaning of subsections 152(4) and 152(4.2)” of the Act.
It was held that because there had been fraudulent misrepresentation, the Minister had full discretion to reassess tax, interest or penalties and re-determine the amount to be paid on account of tax.
Scammers Victimize Immigrants Posing as CRA
Police in Edmonton are warning of scammers who have their sights set on one Canada’s most vulnerable groups: new immigrants.
One couple paid $34,400 to the fraudsters, who are believed to be operating out of Ontario, but Edmonton police did not have much other information at the time of writing.
Fraudsters say they are calling from Canada Revenue Agency (CRA), Canadian Security Intelligence Service, or Immigration Canada, and are demanding money owed to the Canadian Government, claiming that the immigrants have not filed their taxes properly or have not registered as “alien” immigrants.
The calls are frightening: scammers threaten their potential victims with fines, jail time and deportation. In order to remedy their situations, the vulnerable immigrants are told by the scammers to purchase prepaid Visa cards and immediately provide the associated information to them.
“For people that made Canada their home recently, they don’t want to go back into that situation where they came from,” said Detective Mo Banga of the Edmonton Police Service. This, coupled with language and cultural differences, makes this group extra susceptible.
The remedy: don’t give callers any information over the phone. Rather, call the police and report the activity immediately. CRA, as outlined on its website, does not do the following:
· Never requests, by email, personal information of any kind from a taxpayer.
· Never requests information from a taxpayer about a passport, health card, or driver’s license.
· Will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.
· Will not leave any personal information on an answering machine.
Snowbirds: Tax Residency Under Scrutiny at Border
Starting July 1, 2014, Canada and U.S. border authorities will now scan your passport when you enter and exit their country to determine how long a person has actually been out of their country of residence in a given year.
Once U.S. and Canada have access to a day count for everyone, both countries can track a person’s physical presence and use it to apply various immigration and tax laws.
For U.S. tax purposes, you can be deemed a resident if you are present in the U.S. for 183 days in the current calendar year or 183 days over a 3 year period. This is done by counting 100% of the days in the current year, plus 1/3 of the days in the first preceding year and 1/6 of the days in the second preceding year. Even if you meet one of these tests, you can claim closer ties to Canada, exempting you from deemed residency treatment.
Snowbirds should also be aware of the U.S. immigration rules which are slightly different than U.S. tax rules regarding residency. The 183 day tax rules cover a calendar year, whereas the immigration rules state that a non-resident cannot legally spend more than 182 days in the U.S. over a rolling 12 month period.
For example, if you, as a snowbird, chose to spend October to March in the U.S., come back to Canada for the spring and summer but then return to the U.S. prior to the following October, you will be in the U.S. illegally. Even if you returned to Canada for a few days between October and March, the immigration clock does not turn off unless you spend enough time in Canada (minimum two week period); U.S. immigration still considers you to be present in the U.S. and merely ‘visiting’ Canada. You can be barred from the U.S. for a number of years if caught in the country illegally.
You would also be caught under the substantial presence test and therefore deemed a U.S. resident for tax purposes unless you can claim closer ties to Canada.
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What Makes the Isotonix Daily Essentials Kit Unique? Theres nothing more important than taking care of yourself on a daily basis. With the Isotonix Daily Essentials Kit, you can be sure that youre giving your body the essential vitamins, minerals..
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What Financial lessons would you “Do-Over”?
“We don’t make mistakes; we create life experiences.” – Unknown
I’m a big believer in the concept that everything happens for a reason. Sometimes that reason becomes clear later in life, sometimes it doesn’t but, for me, trusting that even the worst experiences are part of a bigger plan makes the tough times easier to handle and the good times all the more enjoyable. I’m not sure if it’s the changing of the season or the fact that my 40 birthday is slowly creeping up on me but I’ve been thinking a lot lately about the experiences I’ve had and the financial lessons I’ve learned along the way. I wouldn’t say that I have any serious regrets but there are definitely some key financial habits I wish I’d adopted earlier and some holes that I would like to have side-stepped rather than fallen into. I saw a quote once that read, “Have you ever stopped to consider that perhaps your sole purpose in life is to serve as a warning to others?” I think that “sole purpose” might be pushing it a little far, but if I had the ability to stage an Ebenezer Scrooge style intervention as the “Ghost of Sarah yet-to-come”, these are the things I might encourage my 16 year old self to “do-over” a little differently:
1. Save More. Spend Less.
So many of the challenges I faced in my 20s and 30s could have been avoided altogether if I’d had more savings and less debt. Understanding (and consistently applying) core financial concepts such as the “rule of 72” and “pay yourself first” along with a strong money management system would have made many of life’s curve balls less devastating and sped up my recovery time. Choosing to pay attention to my Dad’s assertion that “it’s only a bargain if you wanted it before you went into the store” might also have helped keep more of my hard-earned money in my pocket! Good money management isn’t rocket science, it’s pocket science!
2. Use Credit Wisely
Credit can be a blessing and a curse. Used wisely it can help you finance a home, fund business opportunities and earn you a myriad of “rewards” through loyalty programs and incentives. Used with careless abandon and a chronic lack of understanding, it can sink your prospects of a sound financial future faster than quicksand. The debt-hole is easily dug, seriously difficult to get out of and its effects can last a long time. Had I known at 16 what I know now, my choices (and their consequences) would have been dramatically different. Teaching kids about credit, and how to manage it effectively, is fundamental to their financial success, especially in the society we live in today which encourages us to live beyond our means and makes it far too easy for us to do so.
3. If it looks like a lemon. It’s a lemon.
Trust your instincts and trust the experts. Whether it’s a car, a house, an investment or a business deal, if it sounds too good to be true, it probably is. If your gut tells you it’s a bad move, it probably is. Surround yourself with experts you trust and be willing to listen to (and accept) their advice. I learned a number of life and financial lessons as a homeowner and as an entrepreneur and, while I am grateful for the experiences, with hindsight I can see that trusting my instincts and the acting on the advice of experts would have saved me a lot of stress and a lot of money.
There are adages a plenty to help us feel a little better about the mistakes we make but the reality is, that when it comes to finances; far too many of those common mistakes can be avoided. Ignorance is not bliss and what doesn’t kill you can weaken you to a point you may never recover from. I may sound a little over-dramatic but I talk to people every week who are paying the price for mistakes and misjudgments they made years ago; for choices they might not have made if they’d been armed with more information. Too many young people are learning about the perils of credit when they’re already up to their neck in debt and our schools and universities aren’t teaching them what they need to know. I don’t have the ability to stage an intervention with my 16 year old self (more’s the pity!) but I do have the opportunity to share information with my niece and nephew as well as with my clients and friends.
Reduce Your Taxes with Business-Use-Of-Home Expenses
If you have a home business
, it makes sense to ensure that you get the best possible tax result. The CRA allows for you to deduct certain expenses from your business income so that the burden of the costs of making money don’t cause you financial problems.
Claiming Expenses for the Business Use of Your Home
If your home is your principal place of business, you can claim Business-Use-Of-Home expenses on page 3 of the T2125 form
The expenses allowed to be claimed include:
· Home Insurance
· Maintenance (i.e. cleaning materials)
· Mortgage Interest (interest only, not mortgage payment)
· Property Taxes
· Water (if applicable to your business)
The amount you can claim is based on the square footage of the area used for business use. For example, if your house is 1,500 sq ft and the office you work out of is 150 sq ft, then you can claim 10 per cent of the expenses above if you use this room solely for business activities.
If you also use the room for personal use, you also have to calculate the fraction of time that it is used for business use. For example, if you do 4 hours of work a day, 5 days a week, then you have to take 20 hours (4 x 5) divided by 168 hours (24 x 7). In this example, that’s 11.9 per cent. That would be multiplied by the square footage calculation and you would only be able to claim 1.19 per cent of the above expenses. Obviously, you would be better off if you use the room only for business activities.
It’s vital that you keep good records of your expenses, and that you pay attention to how much you actually use your home for business purposes. You want to make sure that everything is done properly so that the CRA can’t claim that you owe more money in taxes.
Applying Home Business Expenses Against Net Income
Unlike the business expenses
and Capital Cost Allowance
you can use to offset some of your tax liability, Business-Use-Of-Home expenses can only be applied against a net income and cannot create a net loss.
For example, if you have $2,000 in business net income and $1,500 in Business-Use-Of-Home expenses then you can claim the full amount. If you have a net loss (income minus expenses), then you cannot claim the Business-Use-Of-Home expenses that year.
Even so, the dollar amount you calculated should still be entered into the tax form as it can be carried forward to future years. This is a nice feature of the tax system. That way, once you are finally achieving a positive net income, you can claim the carried forward amount up to the amount of your net income. If you still can’t claim it all, carry forward the remaining to the next year. Your Business-Use-Of-Home expenses can be carried forward indefinitely, and this is a great help to you in later years as you begin making more money.
While you will have to pay taxes on business income, it doesn’t mean that you have to pay on your gross income. Use these expenses to reduce your net income, and your tax liability.
CPP disability benefit versus early retirement pension
If you are over 60 and qualify to receive a Canada Pension Plan (CPP) disability benefit, you are better off applying for that benefit than applying to take your CPP early. Let’s take a look at who is eligible for a CPP disability benefit, how the benefit is calculated, and what you need to know about your options.
Who is eligible for a CPP disability benefit?
In order to qualify for a CPP disability benefit, your condition must meet the legislative definition of “severe” and “prolonged,” and you must have made contributions for at least the minimum qualifying period (described below).
Severe means that your disability makes you “incapable regularly of pursuing any substantially gainful occupation.”
Prolonged means that your disability is “likely to be long continued and of indefinite duration or is likely to result in death.”
Each of the words in the above definitions has a specific meaning within the disability guidelines that have been developed, but for the purposes of this article let’s just consider that they mean that you are permanently incapable of doing any type of paid employment.
There are currently two methods of meeting the minimum qualifying period, as follows:
· You must have made CPP contributions for at least four of the last six years in your contributory period, or
· You must have made contributions for at least 25 years, at least three of which must be within the last six years of your contributory period.
How is a CPP disability benefit calculated?
A CPP disability benefit is a monthly benefit that consists of a flat-rate portion ($453.52 for 2013) plus 75% of a person’s calculated CPP retirement pension.
Let’s assume the maximum CPP retirement pension is $1,012.50, we can calculate that the maximum CPP disability benefit for 2013 would be $1,212.90.($1,012.50 x 75% = $759.38 + $453.52 = $1,212.90)
Should I apply for a CPP disability benefit or an early retirement pension?
If you think that you meet the medical and contributory requirements for a disability benefit, you should always apply for that. This is because the amount of a disability benefit is always more than a retirement pension, and when you reach age 65 it will convert automatically to an unreduced retirement pension. If you apply for an early retirement pension, it will be paid at that reduced rate for life.
If you do apply for a disability benefit and are denied because you don’t meet either the medical or the contributory requirements, you will be offered the option to have your disability application used as an application for an early retirement pension. Since the disability adjudication process normally takes several months, this means that your early retirement pension would effectively be paid retroactively.
One further option that exists is to submit simultaneous disability and early retirement applications. Your early retirement application will be approved immediately, and if your disability application is eventually approved, it will replace your early retirement pension at the higher rate. The advantage of this is that it guarantees that you have an income stream while your disability application is being adjudicated.
What happens to my disability benefit at age 65?
As mentioned above, a CPP disability converts automatically to a retirement pension at age 65. The easiest way to estimate the amount of the retirement pension in this situation is to subtract the flat-rate portion of the disability benefit and divide the result by 75%.
Example: Susan is receiving a CPP disability benefit of $850.00 per month. When she turns age 65 in 2013, her disability benefit will convert to a retirement pension of $528.64.
($850.00 – $453.52) / 75% = $528.64).
How much would I receive in disability benefit versus an early retirement pension?
Just for comparison, if in the example above Susan had applied for an early retirement pension at age 60 instead of applying for a disability benefit, her retirement pension at age 65 would have been reduced by the actuarial adjustment of 30% for taking it early. As a result, it would have been approximately $370.05 (70% of $528.64 as calculated above).
By applying for a disability benefit at age 60 instead of applying for an early retirement pension, she is ahead by $158.59 ($528.64 – $370.05) monthly at age 65. In addition, she received the higher CPP disability pension of $850.00 for five years instead of the early retirement pension of $370.05, for a total of $28,797.00 more during those five years ($850.00 – $370.05 = $479.95 x 60 months = $28,797.00).
So you can see that if Susan is eligible for a disability benefit and pursues that option, she is much further ahead than if she applies for an early retirement pension. This applies both to the period of time that she receives the disability benefit, and after it converts to a retirement pension at age 65.
Understanding CPP survivor benefits
A question I’m often asked concerns how CPP benefits are calculated when someone is eligible for both a CPP retirement pension and CPP survivor benefits (commonly called a combined benefit).
Many people seem to be aware that these combined benefit calculations are subject to some kind of maximum amount, but what that maximum amount is, is clearly misunderstood. And being subject to a maximum amount is only a small part of the story.
In this article, I hope to help you understand the general process involved in the calculation and to clear up any misunderstandings, especially about the maximum. The calculation is relatively complex and although I’ve included most of the details, I’m not necessarily expecting you to calculate your combined benefit yourself.
Three basic points to be aware of:
· Combined retirement/survivor benefits are subject to a maximum. The way this maximum is applied depends on the age at which you started your retirement pension.
· Even if adding your two benefits together would not exceed the maximum, you will not receive all of both benefits when they are combined.
· If you started receiving your retirement pension earlier than age 65, it will be increased by a special adjustment to offset some of the survivor’s benefit that is “lost” as a result of the combined benefit calculation process.
CPP Survivor benefits calculations
Before I discuss the calculation of a combined retirement/survivor’s benefit, it’s probably useful to understand the calculation of a survivor’s benefit on its own.
There are two basic calculations for a CPP survivor’s benefit, depending on the age of the surviving spouse:
· For a surviving spouse under age 65 (<65), a survivor’s benefit on its own would be 37.5% of the calculated retirement pension of the deceased contributor, plus a flat-rate benefit. The flat-rate benefit is $176.95 for 2013. Using this formula, the maximum <65 survivor’s benefit for 2013 would be $556.54 (37.5% of $1,012.50 + $176.95)
· For a surviving spouse over age 65 (>65), a survivor’s benefit on its own would be 60% of the calculated retirement pension of the deceased contributor. Using this formula, the maximum >65 survivor’s benefit for 2013 would be $607.50 (60% of $1,012.50).
Combined benefit calculations
Now that you have a basic understanding of how a CPP survivor benefit is calculated on its own, let’s look at how it is recalculated when you are also eligible for a CPP retirement pension.
When combining a CPP survivor benefit with a CPP retirement pension, the survivor’s benefit will be reduced from the regular amount described in Survivor’s benefit calculations above,to the lesser of Option A or Option B, as follows:
Under this option, the combined survivor’s benefit is an amount that, when added to the survivor’s own calculated (or unadjusted) retirement pension, equals the maximum CPP retirement pension for that year (plus the <65 flat-rate benefit if applicable).
How this maximum amount works is commonly misunderstood. Many people think that if they start their CPP retirement pension early (at a reduced rate), they will be eligible for a higher survivor’s benefit if/when their spouse dies. This is not true, since it is their calculated retirement pension amount that is used when calculating the combined maximum, which is not the same as their actual retirement pension amount, if they started receiving it earlier or later than age 65.
What this means, is (using the 2013 maximum of $1,012.50 for an age-65 retirement pension):
· Someone who started their CPP retirement pension at age 60 (with a 30% reduction) would effectively have a maximum combined benefit of $708.75 for 2013 (70% of $1,012.50).
· Someone who started their CPP retirement pension at age 70 (with a 42% increase) would effectively have a maximum combined benefit of $1,437.75 for 2013 (142% of $1.012.50).
Let’s use an example. Andrew started receiving his own retirement pension at age 60. He is receiving $490.00 per month (based on a calculated retirement pension of $700.00, reduced by 30% for taking it early). His wife dies in 2013, when he is over age 65. Let’s say that her calculated retirement pension is $800.00, so that Andrew’s survivor’s benefit prior to being combined with his retirement pension would be $480.00 (60% of $800.00).
Under Option A however, the most that Andrew can receive as a survivor’s benefit is $312.50 ($1,012.50 minus his own calculated or unadjusted pension of $700.00).
Under this option, the combined survivor’s benefit is the normal survivor’s benefit calculation as described in the Survivor’s benefit calculations section above, reduced by the lesser of:
· 40% of the earnings-related portion of the survivor’s benefit, or
· 40% of their own calculated retirement pension
Note: By earnings-related portion, I mean the 37.5% or the 60% calculated in the Survivor’s benefit calculations section above.
Using the example of Andrew again, let’s look at how Option B works. As mentioned above, Andrew’s survivor’s benefit prior to being combined would have been $480.00. Under Option B, it will be reduced by the lesser of 40% of itself (40% of $480.00 = $192.00) or 40% of his own calculated retirement pension (40% of $700.00 = $280.00).
The lesser of these two amounts is obviously $192.00, so under Option B, the combined survivor’s benefit would therefore be $288.00 ($480.00 – $192.00).
Since Option A resulted in a combined survivor’s benefit of $312.50 and Option B resulted in a combined survivor’s benefit of $288.00, the lesser of those two amounts is obviously $288.00. Andrew’s combined survivor’s benefit will therefore be $288.00.
Special adjustment to the surviving spouse’s retirement pension
As if the combined calculation wasn’t complex enough already, there is a “special adjustment” that applies if the surviving spouse started receiving their own retirement pension earlier than age 65. The effect of this special adjustment is to partially offset the actuarial adjustment that was applied to their retirement calculation, for any amount by which their survivor’s benefit is reduced under either Option A or B above.
Carrying on with Andrew’s example above, his CPP retirement pension started at age 60, so this special adjustment calculation does apply to him. His uncombined survivor’s benefit would have been $480.00, but under Option B, it was reduced to $288.00 (a reduction of $192.00 as a result of the combined benefit calculation).
His special adjustment would be calculated by multiplying the amount of this reduction in his combined survivor’s benefit ($192.00) by the actuarial adjustment factor for his retirement pension (30%). The resulting amount of $57.60 ($192.00 x 30%) would be added to his retirement pension of $490.00 as a special adjustment. His net CPP retirement pension would therefore be increased to $547.60 ($490.00 + $57.60), making his net combined benefit $835.60 ($547.60 retirement pension plus $288.00 survivor’s benefit).