Canadian Retirement Pension System A d v i S o Ry S o l u t i o n S

As Canadians we have the luxury of one of the best pension systems in the world. Based upon adequacy, sustainability and integrity, Canada’s pension system was ranked fifth in the world in 2010, ahead of countries like the U.S., U.K, and France1. These retirement pension safety nets in Canada help Canada to have one of the lowest poverty levels among other OECD2 countries relative to average earnings3. our pension system is built upon a “three-pillar” retirement savings model that was originally outlined by the World Bank. the goal of the three-pillar system is to separate the objectives of pensions into the following components:

Pillar 1: A simple, universal government-run pension system. In Canada, the federal government provides a basic monthly pension to more than 95% of Canadian seniors who are 65* and older4.

Pillar 2: A mandatory employee/ employer-funded pension plan. In Canada, this is comprised of the Canada Pension Plan (CPP) and Québec Pension Plan (QPP).

Pillar 3: Optional Employer sponsored pension plans such as Defined Benefit Plans and individual savings, which may include Registered Retirement Savings Plans (RRSPs) and TaxFree Savings Accounts (TFSAs).

Pillar 1 – universal government BeneFits/old age securitY Program The Old Age Security (OAS) program was designed to provide a basic monthly pension to Canadians aged 65 or older. Payments are based on the years of residence in Canada after the age of 18. OAS benefits payable are inflation adjusted four times a year to reflect any increases in the cost of living as measured by the Consumer Price Index. The OAS program consists of the Old Age Security Pension, Guaranteed Income Supplement (GIS) and the Allowance.

old Age Security Pension Old Age Security Pension is a taxable monthly benefit provided to most people 65* or older who are Canadian citizens or legal residents of Canada and who have resided for at least 10 years after the age of 18 in Canada. The amount of OAS received is dependent on the number of years lived in Canada. Generally, to receive a full pension amount one must be a resident of Canada for at least 40 years after age 18. For people working outside of Canada for Canadian employers or for international organizations, individuals can have their time working abroad counted towards their residence in Canada. If the time lived in Canada is less, an individual is eligible to apply for a partial pension which will be 1/40th of the full monthly pension for each full year of residence in Canada after the applicant turns age 18. * The 2012 Federal Budget changed the age of eligibility for OAS benefits to age 67 for those born after March 31, 1958. The changes will be phased in over a 6-year period, starting in 2023. An option is also available to voluntarily defer OAS payments up to five years, in order to receive a higher annual pension amount.

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Canadian Retirement Pension System A d v i S o Ry S o l u t i o n S

High-income seniors must pay back all or a portion of their OAS if their annual net income exceeds a certain amount. The repayment is 15% of the excess of your net income for the year over a specific threshold amount. (To access the threshold for clawback, visit the Service Canada website, www.servicecanada.gc.ca.) If you are required to repay a part of your OAS pension in any given year, a suitable amount will be deducted from future OAS payments as a Recovery Tax5. This way, your repayments are spread out over 12 months rather than a large lump sum amount at tax time. If you were a resident in Canada less than 20 years after your 18th birthday, OAS would only be payable for six months following your departure from Canada. If you live outside of Canada, a non-resident withholding tax of 25% of your monthly OAS pension payments is charged unless you reside in a country that has a tax treaty with Canada. Recovery Tax is applied in addition to Non-Resident Tax; however, if Non-Resident Tax is withheld from OAS payments, Recovery Tax amounts will be reduced accordingly.

Guaranteed income Supplement (GiS) If the applicant has little or no income and is eligible to receive full/partial OAS pension, the individual can receive the GIS, an additional monthly non-taxable benefit. The amount of the GIS depends upon the recipient’s annual income and his or her marital status. If the individual is married or living in a common-law relationship, then their combined income is taken into account. Unlike the OAS pension, GIS is only payable for six months following the applicant’s departure from Canada, irrespective of how long the person resided in Canada.

Allowance The Allowance and Allowance for Survivor provide a monthly benefit for low-income seniors eligible for the GIS between the ages of 60 and 64. This benefit is aimed to lower the financial burden experienced by couples living on a single pension and by seniors whose spouse or common-law partner has died. It also helps to bridge the gap until the applicant is entitled to receive OAS at 65 when the allowance benefit is stopped. The Allowance for Survivor stops if the survivor remarries or enters into a common-law relationship for more than 12 months, leaves Canada for more than six months, or dies. The current rates of monthly OAS, GIS, Allowance and Allowance for Survivor pension amounts are available on the Service Canada website. Note: The OAS pensions including the GIS and Allowance are not currently received automatically. The applicant must apply to receive the benefits; however, the 2012 Federal Budget introduced the creation of an automatic enrolment platform. In addition, due to recent changes to the Old Age Security Act, new applicants who have submitted their applications for GIS or Allowance need not reapply for the benefit as long as the applicant files an income tax return each year. Also, it must be duly noted that while OAS pension is taxable, GIS and Allowance are not taxable.

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Canadian Retirement Pension System A d v i S o Ry S o l u t i o n S

Pillar 2: canada Pension Plan (cPP) / QuÉBec Pension Plan (QPP) CPP and QPP* are funded by mandatory contributions from employers, employees and self-employed Canadians, and is available to all working Canadians over 18 years of age who pay into the CPP/QPP and earn employment income of more than $3,500 in a calendar year. Contributions by self-employed individuals are based on net business income after expenses. The CPP/QPP may provide several benefits, depending on individual circumstances including: •

Retirement pension

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Disability benefits

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Survivor benefits

* The Québec Pension Plan (QPP) is a compulsory public insurance plan. Its purpose is to provide persons who work in Québec (or have worked in Québec) and their families with basic financial protection in the event of retirement, death or disability. For more information on the QPP, visit the Régie des rentes Québec website at http://www.rrq.gouv.qc.ca/en/programmes/regime_rentes/Pages/regime_rentes.aspx

Retirement Pension The CPP/QPP retirement pension is a taxable benefit that can be obtained by any individual who has made at least one valid contribution to the CPP/QPP, and can be received as early as when the contributor turns 60 or be deferred until the contributor turns age 70. The CPP/QPP retirement pension is protected from inflation and is adjusted every January to account for any cost of living increases.

Changes to Retirement Pension for Current CPP Contributors It is important to note recent changes in the CPP that will affect your retirement pensions. •

In the past, there was a work cessation test requirement, which required the individual to either stop working or significantly reduce their earnings for at least two months, if he/she decided to receive the CPP before the age of 65. As of 2012, if an individual plans to receive CPP before the age of 65, he/she can now receive their CPP pension without any work interruption.

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Prior to 2011, individuals who started receiving CPP and subsequently returned to work were not required to contribute to CPP. However, the government has introduced a new Post-Retirement Benefit (PRB)** which requires mandatory contributions to the PRB between the ages of 60 and 65 if you continue to work while receiving CPP benefits.

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If you are between the ages of 65 and 70 and receiving CPP benefits, contributions to the PRB are optional. However, if you choose to make contributions, then your employer will also be required to make contributions.

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Canadians who work outside of Québec and receive CPP began making CPP contributions toward the PRB in 2012. The benefit will start being paid out in 2013.

** The Post-Retirement Benefit is a lifetime benefit that increases your retirement income and is adjusted to the cost of living, even if you are drawing the maximum pension from CPP. For more information, refer to the Service Canada website.

did you KnoW? Delaying your CPP retirement pension until age 70 will increase your pension amount by more than 30% over the amount you would receive at age 65. Your CPP is reduced by 0.52 percent for each month you begin receiving pension amounts before age 65, to as early as 60. Conversely, if you decide to delay your pension amounts (up to age 70), your CPP is increased by 0.64 percent per month. As part of ongoing changes being made to CPP, discounts for starting CPP early, and premiums for starting CPP late, will both be increasing. These changes will be phased in between now and 2016. For more information refer to the Service Canada website. Information relating to the adjustment factor for QPP can be found on the Régie des rentes Québec website.

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Canadian Retirement Pension System A d v i s o ry S o l u t i o n s

Disability Benefits This benefit provides a monthly taxable benefit to CPP contributors who are disabled and to their depende nt children. Disability benefits may be available to you if you are under 65, unable to work regularly at any job, and not receiving the CPP retirement pension. To be eligible you must have valid contributions in four of the previous six years, or valid contributions in three of the previous six years after at least 25 years of CPP contributions. When you turn 65, the disability benefit is automatically converted to a retirement pension.

Survivor Benefits Canada Pension Plan survivor benefits are paid to a deceased contributor’s estate, surviving spouse or common-law partner and dependent children. There are three types of benefits: •

The death benefit is a one-time payment to, or on behalf of, the estate of a deceased Canada Pension Plan contributor;

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The survivor’s pension is a monthly pension paid to the surviving spouse or common-law partner of a deceased contributor;

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The children’s benefit is a monthly benefit for dependent children of a deceased contributor. Child must be under 18 to receive the benefit or between 18-25 if attending a qualifying school or university on a full-time basis.

To qualify, the deceased contributor must have contributed to the CPP for at least one-third of the calendar years in their contributory period or 10 years, whichever is less. If you already receive a CPP retirement pension or disability benefit, the survivor benefit will be combined with the other benefit into a single monthly payment. NOTE: The current rates of monthly CPP/QPP payout, along with information on Disability Benefits and Survivor Benefits are available on the Service Canada website.

Factors Affecting Pension Amounts: Drop Out Provision In general, if you have years of low or zero earnings, up to 16 percent (7.5 years) of your low earnings may be excluded from the calculation used to determine your CPP amount. This is called the “general drop-out provision”. In 2014, the percentage will increase from 16 to 17 percent, allowing your eight lowest-earning years to be dropped.

Child Rearing Provision If your earnings stopped or were lower because you were the primary caregiver raising your children under the age of seven, you may be eligible for the child rearing provision, which excludes that period from the calculation used to determine your CPP amount. To qualify, you must have stopped working (or worked fewer hours) and be receiving family allowance payments or be eligible for the Canada Child Tax Benefit.

Pension Income Splitting Pension Income Splitting can potentially help avoid OAS clawbacks for high-income seniors. An individual and his/her spouse or common-law partner can reallocate CPP/QPP income to each other to minimize tax if both are at least 60 years old and have both applied for CPP retirement pensions. This could result in income tax savings if one spouse is in a lower tax bracket than the other spouse.

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Canadian Retirement Pension System A d v i S o Ry S o l u t i o n S

The maximum amount of pension that can be split is pro-rated based on the number of months that an individual has been married or in a common-law relationship in the taxation year, subject to the requirement that the total pension of both spouses be split 50/50 or not at all.

Marriage Breakdown If a marriage or common-law relationship ends, the CPP/QPP credits that were built up by the couple during their time together can be divided equally. These credits can be split even if one of the partners in the relationship made no contributions to the CPP.

Pillar 3 – emPloYer Pension Plans & individual savings Employer Pension Plans In Canada many employers offer a form of pension to their employees to assist them in retirement savings. Registered Pension Plans are registered with the Canada Revenue Agency and the appropriate federal and provincial authorities (as applicable), and must comply with the Income Tax Act and any pension standards rules put in place for each plan type. Depending upon the employer, individuals may accumulate pension earnings through a defined benefit plan or a defined contribution plan during their years of service, to be paid out upon retirement.

defined Benefit Plans A defined benefit plan provides a pre-determined pension income and is generally calculated according to a formula based on a number of factors, including years of service and salary levels. Retirement income is defined regardless of the investment returns and a corporation is liable to make up any deficits in its plan if a prescribed rate of return is not achieved. When an employee retires, they will generally receive a pension payment from the plan or have the ability to receive the commuted value as a lump sum transfer to another registered plan that is generally locked-in with minimum and maximum withdrawal requirements.

defined Contribution Plans Defined contribution plans have a specific accumulated value made up of contributions to the plan plus tax-sheltered investment earnings. The employee knows the amount of contributions that will be placed into the plan but does not know the eventual pension they will receive when they retire. When an employee retires, the accumulated proceeds (including investment returns) will be used to provide an annual income through a life annuity or another registered product that is generally locked-in with minimum and maximum withdrawal requirements.

deferred Profit Sharing Plans A DPSP is funded by the annual profits of a company for the benefit of employees. Taxes on employer contributions and investment income are deferred until the plan member receives the benefit out of the plan. Employee contributions are not permitted in this type of plan. On retirement, an employee’s share of a DPSP is generally transferred to their RRSP.

Group Registered Retirement Savings Plans The group RRSP is a benefit that employers can provide to their employees. For employees, the biggest difference between contributing to a group RRSP versus an individual RRSP is that the contributions can be deducted at the source, and are generally contributed with pre-tax income. Employers may encourage employee contributions by matching them by a certain percentage up to the legislated maximum. RRSPs are owned by the employee, who can choose what to do with them – transfer the assets to another registered plan, redeem and/or add to the amounts, however, employers can maintain a degree of control by restricting withdrawals during the employment term. Canadian Retirement Pension System

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Canadian Retirement Pension System A d v i s o ry S o l u t i o n s

individual savings Individuals can also save using private saving vehicles, such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) to supplement their retirement income. Registered plans can be opened at a financial institutions and investment firms across Canada and individuals receive government support in the form of special tax measures and regulatory oversight with these plan types.

Registered Retirement Savings Plans An RRSP allows individuals to defer taxes on some of their earned income up to a legislated limit. Clients can effectively achieve a “tax-free rollover” of income to an RRSP because they are permitted to deduct the amount of any RRSP contributions. Furthermore, as long as funds remain within an RRSP, investment returns are not taxable. This may not seem like a great benefit over one or two years, but over the long term, tax-sheltered compounding of investment returns can add up to a tremendous advantage.

Tax-Free Savings Accounts The TFSA gives Canadian residents a new way to save – tax-free. Contributions to a TFSA grow tax-free and no tax is paid on income earned within the account, even at the time of a withdrawal. Contributions to a TFSA are made with after-tax dollars and cannot be deducted from annual income for the year. Annual TFSA contribution limits are determined by the Federal Government and are not based on an individual’s earned income. TFSA contributions can be made in addition to RRSP contributions; TFSA contribution room is not affected by contributions made into an RRSP or vice versa. Any withdrawals made from a TFSA are added back to an individual’s TFSA contribution limit in the following year, excluding amounts withdrawn to correct an overcontribution.

Pooled Registered Pension Plans The Federal Government has proposed a Pooled Registered Pension Plan (PRPP) framework that assists employers in offering a lower cost-retirement pension solution. The government is hopeful PRPPs will help reduce the retirement pension gap by engaging business owners who do not currently offer a pension plan to their employees. More information relating to PRPPs will likely be available once the proposed legislation is passed and financial institutions develop an offering of PRPPs to corporations looking to extend this benefit to their employees.

We’re Here To Help There is no question about it, saving for retirement should be one of your primary financial planning objectives. After all, with Canadians living longer you could be spending up to one third of your lifetime in retirement. While that period of your life may still be a few years away, it is crucial that you take the steps during your prime working years to ensure your own personal financial independence in retirement. To ensure that you are on the right track for a comfortable retirement, or for further information on any of the topics discussed in this special report, please contact your CIBC Wood Gundy Investment Advisor.

CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC, Member of the Canadian Investor Protection Fund and Member of the Investment Industry Regulatory Organization of Canada. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors. www.woodgundy.com

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1 http://www.thewhig.com/ArticleDisplay.aspx?e=2808589&archive=true 2 The OECD (Organisation for Economic Co-operation and Development) is an international organization of countries with highly developed economies and democratic governments. http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html 3 http://www.fin.gov.on.ca/en/consultations/pension/retirement.html 4 http://www.canadianlabour.ca/action-center/retirement-security-everyone/retirement-security-reform-2-increase-oasgis-benefits 5 http://www.cra-arc.gc.ca/E/pub/tg/t4155