Did you know that the Canada Pension Plan (CPP) is getting bigger? Every year since 2019 CPP has been expanding and it will continue to expand for the next 40+ years until 2065. By the end, CPP will be HUGE!
CPP is an important retirement benefit. The old “basic” CPP aimed to replace 25% of pre-retirement employment income. The expanded CPP will increase this amount to 33.33% and will cover a larger amount of pre-retirement of income. The result is that CPP will be over 50% larger in the future.
If we follow the rule of thumb* that suggests that we need 70% of pre-retirement income in retirement, then for the average Canadian the new expanded CPP could provide nearly half of retirement income in the future. When combined with OAS this means that over half of retirement income could be covered by CPP and OAS combined.
*Rules of thumb are terrible, I hate them, find out why here.
In this post we’ll look at the current maximum CPP payment, the maximum CPP contribution, the current contribution rate, and how these will change in the future as CPP expands. We’ll also look at how the current “basic” CPP will grow by over 50% in the future…
The Canada Child Benefit is one of the most generous government benefits in Canada and it just increased! Unlike many government benefits, the Canada Child Benefit is available to low, moderate, and also some high income families.
The amount you receive from the Canada Child Benefit (CCB) depends on a few factors, one is the taxable net income for the family (line 23600 on your tax return), another is the number of children in the family, and the final factor is the age of each child.
The Canada Child Benefit is an “income tested” government benefit. The higher your taxable net income is, the lower your Canada Child Benefit will be. For some high income families, at a certain level of income the Canada Child Benefit will be reduced to $0. Anyone with income above that income level will not receive any benefit. The tricky thing is that this income level is different depending on the number of children and their ages.
The Canada Child Benefit also changes every year. New benefits start in July and are based on prior years tax return (the first payment of the updated benefit is July 20th).
The Canada Child Benefit also increases with inflation. The new 2021 Canada Child Benefit has increased by 1.0% versus 2020.
So how much Canada Child Benefit can you expect in July? We’ve got a table below that shows the Canada Child Benefit based on family taxable net income (line 23600) in $10,000 increments, so you can figure out generally how much you can expect in July
There are a large number of benefits available to low and moderate income households. Some of these benefits are government benefits, they provide direct income support. But some of these benefits are a combination of government & private benefits, and they help offset specific expenses.
Many government benefits are automatic based on annual tax filing. As long as an income tax return is filed on time each year, these benefits are automaticity calculated and paid based on adjusted family net income (aka. AFNI… this is essentially line 23600 of your tax return).
But there are other benefits that are available to low and moderate income households and these benefits must be applied for individually, and are not automatic based on annual tax filing, but they can still provide a significant benefit for low and moderate income households.
Most of these non-automatic benefits are delivered with help of private companies and they help offset specific types of expenses. These benefits are a combination of government/private and must be applied for every 1-2 years.
The global pandemic has impacted all of us differently, our personal finances have gone through many changes and some have “weathered the storm” better than others.
FP Canada, the board that governs the Certified Financial Planner (CFP) designation in Canada, recently came out with a survey called “The Tale Of Two Pandemics” and it highlights both the positive and the negative impact that the pandemic has had on our personal finances (more details on the survey results at the end of this post).
There are some troubling stats within the survey, for example 14% of those in Ontario have been forced out of the labor market, 21% have seen an increase in expenses, and 14% have seen a reduction in work hours/income.
But the survey also highlights the opposite side of the pandemic, many people have not experienced a job loss, or a reduction in income, or an increase in expenses over the course of the pandemic.
In fact, looking at the statistics, it looks like there is a large group of people that have not been affected by the pandemic at all, and another group of people who have actually benefited financially from the pandemic.
This is consistent with the conversations we’re having with clients.
For those who have been fortunate enough to remain gainfully employed, for those who own a home or recently purchased a home, for those with a mortgage or other debt like student loans or HELOCs, and for those who are investing on a regular basis, the pandemic has actually improved their personal finances in a number of ways.
The pandemic has impacted us all differently, but for many people there have been one, two, three or more positive changes that may have actually improved their personal finances. As it turns out, this is especially true for those who had a financial plan already in place.
Here are some ways that a person’s personal finances may have improved during the pandemic…
RRSP contributions can be a great tool to help manage your income taxes before and after retirement. They can also be a great tool to help manage your government benefits in a similar way. RRSP contributions affect government benefits like the Canada Child Benefit (CCB), Ontario Child Benefit (OCB), Guaranteed Income Supplement (GIS), GST/HST Credit, Ontario Sales Tax Credit etc etc.
What many people may not realize is that most government benefits have a “claw back” rate that acts like a tax rate. If you earn more income the “clawback” rate will reduce your government benefits. But the opposite also happens, if you make an RRSP contribution and your income goes down, then this “clawback” rate will work in reverse and it will increase your government benefits!
There are a couple situations where RRSP contributions can have a BIG effect on government benefits. Let’s take a look at two real life examples.
One example is a senior who is receiving GIS benefits. We’re going to plan some strategic RRSP contributions to help them maximize their GIS benefits. This is counter-intuitive, we’re always told that TFSAs are best for low-income individuals, but in this case we can use RRSP contributions strategically to maximize GIS.
The second example is a young family with three children. They’re receiving the Canada Child Benefit and the Ontario Child Benefit and we’re going to plan some strategic RRSP contributions to help them maximize their family benefits.
One of the biggest financial planning opportunities for regular people is around government benefits. Unless you’re earning an extremely high income you will probably receive some form of government benefit over the course of your life.
As a student, you may receive GST/HST credits. When you have a family, you may receive the Canada Child Benefit. And when you’re a senior you may receive Old Age Security and the Guaranteed Income Supplement.
Understanding how government benefits work can help you optimize how much you receive both now and in the future. A few simple changes can increase your benefits by $1,000’s per year and help you save more, increase your financial security, and general increase your peace of mind.
Some families may be doing this already, but not realize it. Other families may not be doing it at all, and losing $1,000’s.
Most benefits are based on your net income and most benefits have claw back rates associated with them. As your income increases, your benefit will go down based on this claw back rate. But not all income is created equal, and some types of saving will increase your benefits.
One of the best ways to optimize your benefits is by carefully planning RRSP contributions. RRSP contributions decrease your family net income and increase your benefits. This increase in benefits can provide a big incentive to save. Depending on the number of children, for some families, the increase in benefits from an RRSP contribution is worth more than the tax refund! In total, some families can get back $0.60-$0.70 for each $1 they contribute to RRSPs.
On the other side, when you’re ready to withdrawal from your RRSPs, these withdrawals need to be carefully planned. RRSP withdrawals increase family net income and can potentially trigger claw backs on GIS and OAS. With claw backs on GIS reaching up to 75% it’s important to plan RRSP withdrawals carefully to avoid losing 50%-75% of every $1 you withdraw from RRSPs in retirement.
If you’re earning a normal/average income understanding government benefits can potentially provide a big boost to your long-term financial security. Ignoring government benefits can make things unnecessarily difficult.