One of the things most separating people never think about is how their separation will affect their Canada Pension Plan (CPP) contributions and benefits. In this postwe’ll try to give self-reps a better idea of what’s involved when the CPP and a separation meet.
The Canada Pension Plan has a variety of features and complications that not all of us are aware of. Not even all family law lawyers. Here are some tips to keep in mind if you’re separating in Canada. Here’s some information about some of the CPP features.
Most of us realize that in Canada every employee over 18years of age is required to contribute to the CPP and their employer makes a matching contribution. (Self employed people are to pay both portions.) Once we turn 65 years, or anytime after 60 but at a reduced rate, we start collecting benefits. For many of us this is our only pension.
When a marriage or common law relationship ends the CPP credits earned during the relationship can be split between the parties. This can be done at the request of either party once there’s a divorce or a separation of 12 months. Interestingly, the Plan doesn’t require a court order or separation agreement.
Obviously splitting the credits won’t mean much if both parties worked throughout the marriage or relationship. But if one did and the other didn’t, then this can become a matter of significance.
You can use a rough rule of thumb to figure out that each year of maximum CPP contributions works out to a benefit of about $25/mo of benefits at age 65.
For those of us living in Ontario you can’t waive the entitlement to split the CPP benefits. No separation agreement, or court order if a judge would make one, gets around the fact that the CPP legislation is clear that credit splitting is mandatory unless a province enacts legislation allowing it. While B.C., Alberta, Saskatchewan, and Quebec (for its own Plan) have enacted such legislation, the rest of the provinces haven’t.
So if you live in Ontario there’s no point in trying to get the other side to agree not to apply for the CPP benefits. Even if that’s in the agreement and they later apply, that’s not a breach of the agreement because they didn’t have the right to waive their right to the split in the first place.
In theory you could have an agreement in which the parties agreed not to apply to split the CPP credits and which says that if one does then there would be some indemnification requiring the claiming party to pay to the party whose credits are being split something to offset what that party would be losing. But boy, that’s a tough thing to enforce.
I’ve sometimes seen this in agreements but have never heard of anyone taking their former spouse to court to get back the pension benefits lost. I’m not sure if a judge would even honour that part of the agreement because it’s creating a penalty for someone doing what the other person knew they could and which they didn’t have the right to waive.
So all things considered, our advice is just to leave this out of the agreement altogether.
Besides, if part of a person’s income during the marriage or relationship went to create these benefits rather than staying in the pay cheque used for the family, why shouldn’t the other person get a partial benefit?
When you get a divorce the Government automatically sends out a notification to the parties advising them of their right to apply for a split.
In away, this is easy to explain, but harder to figure out.
The easy part is that when an application for credit splitting is made the administrator takes each party’s contributions, beginning with the year in which the parties began living together up to, but not including the year they separated, and each party receives half for those years.
The harder part is that what this means will only be known once a person becomes eligible to receive their CPP benefits when these figures are included in that person’s lifetime contributions.
Just knowing what’s split while a couple were together doesn’t mean you know what either party will get when they eventually begin to collect CPP benefits.
If you were married and have separated or divorced, there’s no time limit to making the claim to split the benefits earned during your cohabitation so long as you lived together for more than 12 months.
If you were in a common law relationship of at least one year and have been separated for at least one year, you have 4 years within which to request a credit split – or longer if you and your common law spouse agreed to waive the time limit in writing (there’s a waiver document for this on the Government’s website).
Because the CPP benefits are calculated on your contributions to the Plan over your working career and because some of us have an uneven work record in our earlier years, the Plan allows for you to drop up to 8 years of low contributions from the calculations.
As well, if you’re a spouse who dropped out of the work force, or worked fewer hours, to look after children under the age of 7, those years out of the work force can be dropped out of your calculation.
Dropping low earning, or low contribution, years from the calculations increases your CPP benefits when you eventually get them.
To get the lowdown on the details about CPP splitting check out the government’s website Canada Pension Plan Splitting Guide for the Legal Profession
