Planning for retirement as soon as you’re employed (or self-employed) may sound too early. However, this will benefit you in many ways than you can think of. In planning for retirement, knowing the different Canada pension legislation can help you decide which ones apply to you or your employer.
What are the different Canada pension legislations?
The different Canada pension legislations are:
- Mandatory public pension plans: Canada Pension Plan (CPP) and Québec Pension Plan (QPP)
- Private pension plans: workplace pension plans or employer-sponsored pension plans
Canada Pension Plan (CPP)
All employees and employers in Canada are required to contribute to the CPP. Those in Québec are covered by the QPP.
The CPP provides old age retirement pension and other benefits, such as disability benefits.
Contributions
As required by Canada pension legislation, every employee must contribute to the CPP if:
- they are over 18 years old
- they work in Canada, but outside the province of Québec
- they earn more than C$3,500 per year
As of 2023, the contribution rate for the CPP is 11.9%, which is split between the employee and the employer. If a person is self-employed, they will have to pay the full contribution rate.
To get the actual amount, the contribution rate will be applied to an employee’s pensionable earnings, which is the annual earnings between the minimum and maximum amounts set by the CPP.
While the minimum amount is fixed at C$3,500 per year, the maximum amount is at C$66,600 for the year 2023.
This means that, as of 2023, the maximum annual employee and employer contribution would be C$3,754.45. It would be C$7,508.90 for those who are self-employed.
Qualifications
Much like any other Canada pension legislation, a person qualifies for retirement pension if:
- they are at least 60 years old
- they have made valid and substantial contributions to the CPP
Pension
The amount of retirement pension that a retiree or pensioner receives under the CPP will depend on:
- the total amount of the retiree’s contributions to the CPP
- the length of time that the retiree contributed to the CPP
- average earnings of the retiree throughout their employment
As of 2023, the maximum monthly amount that a retiree or pensioner can receive would be C$1,306.57, if they decide to receive their pension at the age of 65. As for the average amount, it would be C$760.07.
Application
A retiree or pensioner will have to apply with the CPP to receive a monthly pension; this is not automatic.
Applications may be done online through one’s My Service Canada account. Under certain circumstances, a paper application can be submitted by mailing it to the nearest Service Canada office.
Wondering about your options after reaching 65 years old? Watch this video:
To know more about these scenarios, talk to a lawyer in your province. If you’re in Toronto, for example, consult with a Lexpert-Ranked pensions & employee benefits lawyer in Ontario.
Québec Pension Plan (QPP)
The Québec Pension Plan (QPP) is another Canada pension legislation that applies specifically to employees and employers in Québec. The QPP follows the same conditions and processes as the CPP.
If an employee contributes to the CPP and the QPP, both payments are taken into consideration when computing the retiree’s monthly retirement benefits.
For more details on how the CPP and QPP overlap, employees and employers should consult with a Lexpert-Ranked pensions & employee benefits lawyer in Québec.
Private pension plans
The CPP and QPP were established through different provincial pension laws in Canada. These are then regulated by their respective provincial pension regulators.
Private pension plans can be added on top of the CPP and QPP. These are voluntary pension plans. They can be offered by the employees’ union in certain workplaces or by the employer as an added benefit for its employees.
Provincial pension legislation
Some of Canada’s provincial pension legislation are:
- Ontario: Pension Benefits Act
- Québec: Supplemental Pension Plans Act
- British Columbia: Pension Benefits Standards Act
- Alberta: Employment Pension Plans Act
- Manitoba: The Pension Benefits Act
Note that Québec’s Supplemental Pension Plans Act is in addition to the QPP. In the same way, these provincial pension plans are in addition to the benefits under the CPP.
There is no existing pension legislation for the province of Prince Edward Island.
Regulation
These provincial pension plans are required to:
- Register with the regulating authority in their province
- Comply with the registration requirements set by the Income Tax Act
- Have an administrator who shall have specific duties and responsibilities
- Have a contingency plan in the event of winding up or liquidation of the pension plan, or insolvency of the employer
- Any other conditions set by the applicable provincial pension legislation
Find out what is the tax rate on pension income in Canada and how it can be legally reduced.
Defined Benefit vs. Defined Contribution
The private pension plans may be classified as defined benefit (DB) pension plans or defined contribution (DC) pension plans.
The difference between the two is mainly on its schemes and the computation of its pension benefits:
1. Defined Benefit (DB): the amount that a pensioner is paid is based on:
- contributions when employed
- number of years of service
- age when pensioner retired
- annual earnings at the time of retirement
2. Defined Contribution (DC): the contributions of a pensioner will be invested and are paid after retirement based on:
- the chosen investment plan
- the earnings of investments
- amount invested in the plan
- age when the pensioner retired
- pensioner's longevity
What are the changes to Canada Pension Plan in 2023?
Contribution rates change not just for the CPP, but also for other Canada pension laws. Employers, employees, and self-employed individuals must update themselves on these changes.
In CPP for example, as of 2023, there will be no further rate increases if an employee earns less than the earnings ceiling. It will stay at 5.95% for employers and employees and at 11.9% for self-employed individuals.
Got questions about Canada pension legislation and how they apply to you? Ask any of the Lexpert-Ranked pensions & employee benefits lawyers in Canada.