RETIREMENT INCOME IN CANADA is made up of three parts: public pensions consisting of the Old Age Security
Pension and the Canada Pension Plan, Registered Retirement Savings Plans (RRSPs) and
Registered Pension Plans (RPPs).
The Old Age Security Pension is provided to
all Canadians who meet certain residency requirements. It provides a set minimum income to
its recipients; however, those with high retirement incomes will have their benefits
progressively "clawed back" so that at a certain income level they will be
For Canadians with incomes below a certain
threshold, additional Old Age Security programmes have been developed to assist those in
need. These include the Guaranteed Income Supplement for low-income pensioners, the
Spouses Allowance for their spouses and the Widowed Spouses Allowance for
those whose spouses have passed away.
The Canada/Quebec Pension Plan is for
residents who have earned employment income over their working lives. In order to qualify
a member must have worked and made contributions to the plan thereby building up
credits for contributory periods. Those credits, up to a maximum level, are used to
determine the benefits that will be received upon retirement.
For the most part, the Canada Pension Plan
is similar to its Quebec counterpart. Both provide a benefit that is approximately equal
to 25% of the retirees pre-retirement salary up to the years annual maximum
pensionable earnings. These are based on Canadas average industrial wage for the
In addition to the above, all of the
provinces have established programs to assist those who are still in need even after
qualifying for the above benefits.
A Registered Retirement Savings Plan is a
government sanctioned income tax shelter or income tax deferral mechanism that allows
Canadian individual taxpayers to deduct, from income subject to income tax, specifled
amounts that have been contributed to the plan. These earnings accumulate in the plan free
of current income tax.
When the taxpayer reaches a prescribed
mandatory age in a particular year (current age 69), he must convert his plan into
retirement income by the end of that year and the retirement income payments must commence
in the following calendar year.
The taxpayer need not wait until age 69 to
commence receiving the retirement income, although as a practical matter, taxpayers prefer
to allow their contributions to remain income tax sheltered for as long as they do not
need the proceeds to live on.
Before the taxpayer begins to receive a
retirement income he must first convert his plan to either a Registered Retirement Income
Fund (RRIP) or an annuity. Alternatively, he may choose to withdraw the funds in their
entirety in cash. If he chooses this option, the realized funds will be included in income
and income taxes will be due on the total amount.
The RRLF is essentially a continuation of
the RRSP. The taxpayer is required to receive and take into income a specified minimum
amount of his RRIF each year until such time as the fund is depleted.
Alternatively, a lifetime annuity may be
purchased with the proceeds of the fund. These will provide monthly withdrawals that must
be taken into income and taxed upon receipt.
Registered pension plans, the subject of
most of this newsletter, are established by a sponsor, typically an employer or trade
association, which makes income tax deductible contributions, within limits established by
government regulation, into an investment fund. The plans may also require contributions
by members and these too are ordinarily income tax deductible to the contributor.
Many plans also include
"buy-back" options which allow contributors in some circumstances to make up for
years in which they were not covered by the plan or for years which can now earn more
benefits than were provided at that time.
When the pension plan is sponsored by a large employer, the
eventual pension received by the employee will be based upon a formula that usually
involves the number of years in which contributions have been made and the employees
annual salary in his last few years of employment. When the pension plan is sponsored by a
trade association, the eventual pension received by the contributor will usually be based
on amounts contributed to the plan on behalf of the member each year plus some Investment
component that such funds will have earned under the plans administration.