The article “How to Maximize Government Pensions” was originally published on MoneySense on April 7, 2015.
The timing of when to begin CPP can be more art than science
Q: I am 65 in November and have applied for my CPP. I am considering applying for OAS, but know a huge clawback will occur. My wife is 63 and doesn’t have any income. She has been estimated to receive approximately $200 CPP at age 65. Would it be beneficial for her to take a reduced pension now and we CPP pension share or should I continue with one tax return and claim for her?—Tom
A: Canada has two federal retirement pensions—Canada Pension Plan (CPP) and Old Age Security (OAS). How much you get and how much you keep depends, in part, on you.
The timing of when to begin CPP can be more art than science, Tom. You can start your CPP any time between age 60 and 70. It used to be that the discount for taking your pension early was pretty low and I tended to gravitate towards early CPP in most cases. Service Canada was onto this and in 2011, increased the discount, making it more punitive to take CPP early. As of 2015, the discount for taking your CPP prior to age 65 is 0.58% per month. In 2016, that discount increases to 0.6% per month. If you take CPP after age 65, your pension is increased by 0.7% per month.
Here are some reasons for your wife to consider taking her CPP early:
– You guys need the money now for cash flow
– You guys have debt that you could pay off with the extra income
– Your wife is expected to have a shorter than average life expectancy
– You guys have a high investment risk tolerance and a high expected investment rate of return on your retirement savings
CPP pension sharing is meant to try to help spouses equalize their retirement income. You can apply to Service Canada to split the portion of your pensions earned while living together during your joint contributory period.
Since you’ve already applied to start your CPP, you might be wise to do the same for your wife and apply to share your pensions. This will shift some of your income to her tax return because her CPP will be increased and yours will be decreased accordingly. On a net basis, this will likely save the two of you tax as a family, Tom, especially if your income is high enough that you think you’ll have some of your OAS clawed back. Your wife’s tax payable may very well be half the tax savings you give up by not claiming her on your tax return (presumably you’re referring to the “spousal amount” if she has low or no income).
If your wife was home with your kids when they were under the age of 7 and she contributed at less than the maximum level for CPP, make sure you also apply for the Child-Rearing Provision, Tom. This will remove low income years from your wife’s CPP calculation and may therefore increase her entitlement.
Pension income splitting and the new Family Tax Cut are other easy measures that can be used to split income and reduce tax retroactively on your tax returns. Proactive planning may also help you split income and reduce tax going forward.
As of 2013, you can now defer receipt of your OAS pension by up to 5 years from the normal age 65 start date. Delaying receipt means a higher pension—your entitlement is increased by 0.6% for every month you delay past age 65. I’d use some of the same general considerations for when to draw CPP above to contemplate timing on your OAS pension.
For the 2015 tax year, the OAS clawback is 15 cents for every dollar your net income on your tax return exceeds $72,809. So to the extent you can minimize your income or equalize your income with your spouse to stay below this level, it’s worth considering.
If your income will always exceed the OAS clawback limit, it may well be a wash to defer your OAS start date. You’ll get a higher OAS pension, but you’ll have to wait to get it and perhaps even more of it will get clawed back. But with planning, you may be able to defer your OAS, smooth your retirement income and maintain or increase your entitlement.
Retirement planning requires more than just rules of thumb. Take the time to determine where your retirement income will come from, what the tax implications are and if there’s a better way to do things than just sticking with the defaults—whether on your own or with the help of a professional.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
