While admirable, pausing a career to raise a child comes with cascading effects, some of which can last throughout your lifetime.
One effect is those years of unemployment – or underemployment - on your Canadian Pension Plan (CPP) benefits. These lower-income years act like a stone, weighing down your CPP benefits and lowering your amount of eligible income come retirement.
The Child Rearing Provision
The good news is the government has created a special CPP provision for parents who have decided to stay at home to raise their children. Essentially, the Child Rearing Provision allows parents to “tell” the government to ignore those years they’ve stayed at home, or worked part-time, thereby raising their prospective benefit payments.
To help you better understand how you can make use of this provision, and whether it’s a good choice for you, we’ll review how CPP is calculated and how the Child Rearing Provision affects that.
What is CPP?
For most people under retirement age, CPP is just another deduction on their paycheque, but for retirees, it is guaranteed income for the rest of their life.
To make this possible, the Canadian government requires all working-age Canadians, from 18-65 to contribute based on their income. This payment is set at 5.45% of each Canadian’s income, up to a max of $3,166.45 per year.
However, employees aren’t the only people paying into CPP. Employers* are also required to match each contribution, effectively doubling each employee’s contribution.
Then, at retirement, Canadians are eligible for a monthly, taxable benefit that is guaranteed to continue until death. However, not all retirees receive the same benefits. The government calculates benefits payment based on how much the retiree contributed during their working years.
*Self-employed Canadians are required to pay both the employer’s and employee’s portion of CPP, raising the max contribution to $6,332.90.
How is CPP calculated?
Currently, the max benefit for Canadians is $1,203.75 per month, however, few Canadians max out their CPP benefits.
The pension benefit is calculated based on how much you’ve paid into the pension plan between the ages of 18-65, and when you decide to start pulling out your benefits.
How the age you begin receiving benefits affects CPP
You can start taking your benefits at the age of 60, or delay them up to the age of 70. If you choose to take them before the age of 65, the benefit is permanently reduced by 0.6% for every month before your 65th birthday you choose to start receiving your CPP payments. That equals a 7.2% decrease per year.
However, if you choose to take your benefits later, they will permanently increase by 0.7% for every month after your 65th birthday you delay taking them. That equals an increase of 8.4% per year.
How your payments affect CPP
Because your contributions will change throughout your working life, your CPP contributions can vary from minuscule to maxing out. If you max out your CPP contributions throughout your working life, you will receive the maximum benefit. However, each year you give less than the maximum amount, it will lower your benefit payments.
The government does recognize that people go through more difficult times, or need to work their way up the ladder. So, to make up for those lower-income years, the government will essentially ignore eight of your lowest income years in their calculations. This brings your average contributions up, thereby increasing your benefits.
However, if you took off time for child-rearing, or even dropped your hours to part-time, these eight years can get eaten up quickly, leaving your early, lower-income years still on the books.
This is where the child rearing provision comes in.
How does the Child Rearing Provision factor into CPP?
In addition to those eight years mentioned above, the Child Rearing Provision allows you to take your child-rearing years out of the equation, increasing the overall amount of your retirement benefits.
How it works
For each child you (or your partner) take time away to raise, you can choose to exclude up to seven years of income from the child’s birthdate, if your income during these years was lower than previous years.
However, it’s important to understand that the Child Rearing Provision is not automatically included in your CPP calculations. It must be applied for.
Tom and Brenda were both employed until they had a son, Jeremy, in 1987. Brenda decided to stay home until Jeremy started school in 1994.
When Brenda applies for CPP, and the Child Rearing Provision, in 2025 at age 65, CPP will exclude those years between 1987 and 1994, if it’s beneficial for her.
This will increase Brenda’s benefit by up to $85 a month.
Eligibility requirements for the Child Rearing Provision
The child-rearing provision can be used when:
• You had a child after December 31, 1958
• You or your spouse/common-law partner received Family Allowance payments or were eligible for the Canada Child Tax Benefit (whether or not you received it)
• Choosing to be the primary caregiver of your child (under the age of seven) caused you to work fewer hours, or stop working altogether, resulting in lower earnings
Either spouse or common-law partner can apply for the child-rearing provision, but both parents cannot claim it for the same time period.