Canadian Taxation: Government Pensions
by George Gonzalez
There are two primary federal government pension programs for retired Canadians: Canada Pension Plan (CPP) and Old Age Security (OAS). One of these (CPP) is based on contributions you make during your working years, while the other one (OAS) is based on age and income. A third government program, designed for low-income individuals, is the Guaranteed Income Supplement (GIS) program. In this article I discuss the general nature of each of these programs, the ramifications of non-residency for them, and the related income taxation issues.
Canada Pension Plan (CPP)
CPP pension benefits are meant to replace a part of one’s income at retirement. After reaching retirement age and applying for CPP benefits, the federal government will make monthly payments to a CPP recipient. Once started, monthly CPP payments continue for the rest of your life. Normal retirement age is 65, but you may apply for payments as early as age 60 and as late as age 70.
The monthly CPP amount is dependent on these main factors: (1) the amounts of CPP contributions that you made during your working years, (2) the length of time over which you made your CPP contributions, (3) the average of your earnings during your working years, and (4) the age at which you choose to start your CPP payments. Currently, the maximum monthly amount at a starting age of 65 is $1,306.57.
If you choose to start CPP at an age different than 65, the monthly amount is adjusted either downward or upward. Starting CPP earlier than age 65 results in a smaller monthly benefit, and starting at an age beyond 65 results in a higher monthly amount. The maximum monthly CPP amount that one can receive is based on age 70, so there is no benefit in waiting past 70 to start receiving CPP payments.
Your monthly CPP amount is increased each year to reflect increases in the cost-of-living index (the Consumer Price Index, or CPI). If there is a decrease in the CPI, there is no change to CPP amounts; as prescribed under the Canada Pension Plan Act, CPP benefit amounts stay at the same level when there is a decrease in the cost of living.
Old Age Security (OAS)
OAS is a monthly pension payment for Canadians who are 65 and older. You can receive OAS regardless of your past working history, even if you never worked. A key qualification factor is residency status:
- If you are a Canadian resident, you must be 65 years old or older and have resided in Canada for at least 10 years since the age of 18 to qualify for OAS.
- If you are a non-resident of Canada, you must be 65 years old or older and have resided in Canada for at least 20 years since the age of 18 to qualify.
As with CPP, the maximum monthly OAS amount changes periodically with changes in cost of living. As of this writing the maximum monthly amount for individuals aged 65 to 74 is $691.00, and for individuals older than 74 it is $760.10.
Some or all of one’s OAS payment must be paid back, or “clawed back”, if annual income is over a certain “floor”. Currently that floor is $79,845. The clawback amount is proportional to the excess of your annual income over the floor. Clawback reaches 100% at the ceiling amount, currently $129,757. This OAS clawback is formally called the OAS Pension Recovery Tax.
Here are a few examples of how the numbers could work, assuming monthly OAS before clawback of $691.00:
- If your annual income is $104,801, which is halfway between the floor of $79,845 and the ceiling of $129,757, your monthly OAS of $691.00 is clawed back 50%, to $345.50.
- If your annual income is $117,279, which is three-quarters of the way from $79,845 to $129,757, your monthly OAS of $691.00 is clawed back 75%, to $172.75.
- If your annual income is $129,757 or more, your OAS is clawed back 100%, to $0.
In general, your “annual income” amount is the income that is included in your income tax return. Non-taxable income (e.g., gifts, inheritances, lottery winnings, etc.) is not included in determining annual income for purposes of the OAS clawback.
The mechanism for the clawback is as follows. Based on your income tax return for a calendar year, if your income is greater than the OAS floor (discussed above), then your OAS payments for the following year are reduced from the regular OAS amount. Using the amounts from the first example above, if the income reported in your income tax return for a calendar year was $104,801, then your monthly OAS payments for the following year would be $345.50.
Guaranteed Income Supplement (GIS)
Individuals who receive OAS payments may qualify for an additional monthly benefit, called Guaranteed Income Supplement (GIS). To qualify, an individual must be 65 years or older, live in Canada, currently receive OAS, and have annual income below a certain threshold. As of this writing the threshold is annual income of $21,168 for a single individual, $27,984 if the individual is married and the spouse does receive OAS, and $50,736 if the spouse does not receive OAS.
As of this writing the maximum monthly GIS payment is $1,026.96 for singles and individuals whose spouse does not receive OAS, and $618.15 for married individuals whose spouse receives OAS.
Effect of Non-Residency on Government Pension Benefits
Non-resident has no effect on CPP benefits. Nor does it affect OAS benefits, except for qualification purposes, as discussed above. Non-resident status does affect GIS, as these benefits are available to residents only.
Taxation of CPP, OAS and GIS
Both CPP and OAS pension income payments are fully taxable for income tax purposes, while GIS payments are non-taxable.
The mechanics of taxation of CPP and OAS benefits depends on residency. A resident includes their CPP and OAS payments in their annual income tax return, and pays tax on that basis. A non-resident, on the other hand, pays tax on their pension benefits through withholding at the source. That is to say, the payor of the pension (the federal government) withholds an amount based on a withholding tax rate, and the pension recipient receives a net payment.
The withholding tax rate on pension income, and other types of income that are subject to the withholding tax rules, depends on whether there is a treaty in place between Canada and the non-resident individual’s country of residence. In the absence of a treaty, the withholding tax rate is 25%. A treaty may provide for a lower withholding tax rate. For example, the withholding tax rate for pension income under the Canada-Mexico treaty is 15%.
The non-resident who pays the withholding tax is considered to have met their income tax filing requirements for that income, i.e., no income tax return need be filed. It is worth noting, however, regarding pension income payments, RRSP payments, and other types of retirement income benefits, a non-resident may choose to file an income tax return and pay tax on that basis rather than via a withholding tax. This can be beneficial if the withholding tax rate is higher than the tax rate that the individual would be otherwise subject to if they paid tax based on the general progressive tax rates for individuals. See the article on electing to file a Section 217 tax return in these web pages.
Additionally, for the types of income described in the last paragraph (pension income payments, RRSP payments, and other types of retirement income benefits), if the non-resident believes that the withholding tax rate is higher than it should be, the non-resident can apply to the CRA for permission to have withholding based on a lower withholding tax rate. The form that is used for this is Form NR5 (Application by a Non-Resident of Canada when completed for a Reduction in the Amount of Non-Resident Tax Required to be Withheld for Tax Year _____). The CRA will review the information provided in this form, determine if a withholding rate less than the current one being used is appropriate, and if so, communicate this to the payer so that they reduce the amount of non-resident tax withheld from your retirement income payments. See the article on Section tax returns in these web pages.
The two options just described (filing an income tax return and calculating the actual tax, and applying to the CRA for a reduced tax withholding rate) can be especially beneficial if you reside in a non-treaty country, in which case the withholding tax rate would be 25%. If your Canadian-source income is such that it would put you in a tax bracket higher than 25% (for example, the 26% bracket, or the highest federal tax bracket of 33%), then the above options may not benefit you. Otherwise, they very well may benefit you.
The recommendation here is that you or your professional tax advisor perform the appropriate calculations to determine if you would benefit from the above options.
An important information filing requirement exists for non-resident OAS recipients. Non-residents who receive OAS pension payments are required to file an annual information return with the CRA using Form T1136 (Old Age Security Return of Income). The CRA uses the information on this form to determine if you have to pay the clawback, i.e., the OAS recovery tax, on your OAS pension. The CRA publishes a guide, the “Old Age Security Return of Income Guide for Non-Residents”, with details on this information return. Notwithstanding, non-residents of Canada who reside in certain countries are not required to file the Form T1136 information return, and are not subject to the clawback or recovery tax. The aforementioned CRA guide lists those countries.
Conclusion
Government pensions such as CPP, OAS and GIS provide individuals with monthly income when they retire. The monthly amounts depend on various factors for each of these programs, as discussed in this article. CPP and OAS benefits do not depend on residency, whereas GIS benefits are available to residents only.
Both CPP and OAS payments are taxable, while GIS payments are not. Canadian residents include their CPP and OAS payments in their annual income tax return. Non-residents pay a withholding tax on their pension payments, and need not file an annual income tax return to declare and pay tax on CPP and OAS income, although they have the option of electing to file a Section 217 tax return and pay tax on pension income on that basis.
1For Quebec residents, the counterpart to CPP is the Quebec Pension Plan (QPP).
2 KPMG publishes a summary of withholding tax rates on various types of income under Canada’s tax treaties with other countries: https://home.kpmg/content/dam/kpmg/ca/pdf/2017/02/non-resident-withholding-tax-rates-for-treaty-countries.pdf.
3 CRA Web page Old Age Security Return of Income Guide for Non-Residents https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4155/t4155-20e.pdf.