The Canadian pension system has three main elements.
The first is the Old Age Security Program, a comprehensive pension scheme funded from general government income. It provides pensions to all Canadians who have reached the age of 65 and have been living (residing) in the country for some time. This scheme has been in place since 1952.
The second element is the Canada Pension Plan and its equivalent for the Province of Quebec.
Canada’s Pension Plan is a mandatory national pay-as-you-go, contributory pension plan based on a defined benefit system linked to the payroll of the recipient. It is funded by payroll tax, paid equally by the employer and employee. The state makes no contributions. This is a relatively new program, established in the mid 1960s.
The third element is voluntary pension programs. They include traditional professional pension funds financed by employers, trade unions or industries. It also includes personal pension accounts managed by financial institutions such as banks and insurance companies. Some professional pension funds are funded exclusively by employers, but most are funded by both employers and employees.
I. Old Age Security Program
As a rule, Old Age Security provides a basic level of pension income to all persons 65 years of age or older who have lived in Canada for more than 10 years in adulthood. Old Age Security provides 4 types of benefits:
1) Old Age Security Pension. It is a fixed pension paid to all Canadians who are eligible, regardless of their income level. However, people with annual taxable income exceeding a certain amount must return part of their Old Age Security Pension. This part is gradually increased until 100% of this pension is reached.
2) International Benefit is the same as the Old Age Security Pension for Canadians over 65 years of age who live abroad; to receive this benefit you must have lived in Canada for 20 years after reaching the age of 18 and be a Canadian citizen.
3) Guaranteed Income Supplement. The income-based supplement is an income-based supplement to a fixed pension that is paid to low-income recipients of a fixed pension. If the recipient lives alone, the monthly amount is reduced by $1 CAD for every $2 CAD received from other sources of income, excluding the Old Age Security Pension. The amount of the surcharge and its reduction are adjusted accordingly if the person lives with his or her wife/husband.
4) Dependency allowance (Allowance Program). This is a temporary cash benefit paid to low-income husbands/wives of Old Age Security Pension recipients and to widowers/widowers between the ages of 60 and 64 until they begin to receive their basic fixed Old Age Security Pension.
II. Canada Pension Plan
Canada’s retirement plan covers almost all types of employment and earnings up to the average wage in industry. This plan insures taxpayers and their families against loss of income due to retirement, disability, and death.
The Canada Pension Plan is a national pension plan. Both the design and management of Canada’s Pension Plan are very well coordinated so that workers do not lose anything when moving from Quebec to another part of the country and vice versa.
Participation in this plan begins at age 18. A normal pension is paid when you reach the age of 65. Appropriately adjusted benefits can also be received before and after 65 years of age. The program also pays a disability allowance and a survivor’s allowance. The average salary for all years of service is indexed by the date of reaching the age of 65 in accordance with the growth in the average salary in the country. 15% of the period of employment when wages were lowest is excluded, as are the years during which disability allowance was paid and (if this results in an increase in the allowance) the years during which the contributor had children under 7 years of age. Thus, after about 40 years, the maximum benefit is usually reached, equal to 25% of the average earnings during the period of employment.
III. Voluntary pension programs
(a) Professional pension funds
These programs are funded by employers and, to a much lesser extent, by unions and/or employee associations. They are managed by private companies, except when local governments and public bodies fund voluntary pension programs for their employees. While more than half of these funds are based on a defined contribution system, more than 80 percent of participants (and assets) belong to defined benefit schemes.
About 40 percent of employees in Canada participate in professional pension funds, including government officials at the federal, provincial and municipal levels, who account for about 50 percent of all participants.
b) Individual pension accounts
Canada has one of the best (according to expert estimates) individual retirement programs. Under this program (RRSP-Retirement Saving Plan), you have the legal opportunity to reduce your taxes for a year, make a profit from that money, and not tax it. It is possible to use this money when you buy a house or pay for courses, so you can use it before you retire when you need it.
Individuals can open as many RRSP accounts as they wish at any time and in any financial institution. Financial institutions authorized to operate in Canada (large and small banks, insurance companies, trust companies, mutual funds, etc.) may compete with each other to attract investors.
Since the late 1980s, pension legislation has been subject to changes aimed at increasing the “transportability” of pension services provided by professional pension funds. Employees who cease to participate in these funds and wish to withdraw the value of their earned benefits may open a special RRSP account and transfer these funds to it. Such accounts are called frozen pension accounts. These accounts generally follow the same rules as regular RRSP accounts, but there are some differences, chief among which is that funds cannot be withdrawn from such an account until the holder reaches retirement age.
c) Amounts of pension benefits and indexation
Old Age Security Pension is currently just over 450 CDs per month. This is about 13.5 percent of the average salary, which is now about 40,000 per year.
The maximum benefit The Guaranteed Income Supplement is now about 540 CDs per month for singles.
Together, the Old Age Security Pension and the Guaranteed Income Supplement are approximately 30% of the national average wage.
Old Age Security Pension is indexed every three months according to price increases. As a result, the rates mentioned above tend to gradually decrease over time.
Canada’s Old Age Security Pension maximum is approaching 10,000 CDs per year, but in fact the average pension under this plan does not reach 6,000 CDs for those who are just beginning to receive it at age 65. For the person receiving the average salary, the maximum amount of this pension means that the replacement rate will be approximately 25 percent.
Of course, benefits under defined contribution plans and RRSPs vary greatly depending on the amount of contributions, length of savings, actual return on investment (net of costs), and if you purchase annuities, and the market situation.
With the exception of defined benefit plans for government employees, where pensions are generally indexed in accordance with rising prices, other defined benefit professional pension plans provide little or no indexation. Defined benefit occupational plans and RRSPs may pay benefits in a number of ways, including through the use of annuities. Benefits may be paid in such a way as to ensure partial and sometimes even full indexation according to price increases. Canada does not apply indexation according to wage increases.
V. Taxation .
Pension taxation in Canada corresponds to the so-called UN model. Contributions are excluded from taxable income. If they are paid by employers, they are excluded as legal current expenses, and are not taxed as the income of employees for whom these contributions are made. If contributions are paid by employees, they are excluded from taxable income of the taxpayers. Investment income received by pension trust funds or personal accounts is not taxable. All benefits are fully taxed.
To be eligible for these generous tax benefits, pension programs must meet certain rules and be registered with the tax authorities. Practically all persons participating in professional pension programs.
How do I apply for a pension in Canada?
Old Age Security Pension – Old Age Security Pension is payable to all Canadians who have reached the age of 65 years, Canadian citizens, or persons who have permanent residency status at the time of filing and/or who have lived in Canada for 10 years after reaching the age of 18.
You may apply for the Old Age Security Pension as early as 6 months before your 65th birthday.
1) Birth certificate (and a notarized translation into English);
2) Documents confirming citizenship (passport) and/or immigration documents (Permanent Resident Card).
3) Documentary package (HRDC Forms), including application and annexes (for checking personal and bank data).
Old Age Security Identification Card – A retirement insurance card.
This document is sent by Service Canada on behalf of Human Resources and Social Development Canada (HRSDC) and is one of the ID documents used by a bank to obtain a pension and to get discounts in stores and restaurants and benefits for travel on public transportation. Before 2008, the Old Age Security Identification Card had a Social Security Number, now only personal data (photo, name, address, phone number) and the owner’s signature are indicated.
What happens if a pensioner leaves Canada?
The old age pension is paid to everyone who is also eligible for it abroad (the country must have an economic agreement with Canada).
For this purpose it is necessary :
1) to live in Canada for at least 20 years (after the age of 18);
2) be a citizen of Canada or have permanent residency status at the time of leaving the country.
How is the old-age pension calculated in Canada?
You may be eligible for a full pension if
1) If you have lived in Canada for more than 40 years (after reaching 18 years of age);
2) If you were born before July 1, 1952;
3) If you lived in Canada between your 18th birthday and July 1, 1977;
4) If you have lived in Canada for the last 10 years at the time of application.
5) If you have lived in Canada after your 18th birthday, 3 times as long as you have lived abroad for the last 10 years.
In other cases, you may be eligible for a Partial Pension.
A full old-age pension is not taxable if the amount is less than $62,144 per year.