For seniors in Canada, understanding the three main pillars of government retirement income – the Canada Pension Plan (CPP), Old Age Security (OAS), and the Guaranteed Income Supplement (GIS) – is crucial for effective financial planning. While they all provide income, they differ significantly in how they are funded, their eligibility requirements, and whether they are taxable.

 

Let's break them down:​

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Canada Pension Plan (CPP)

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The CPP is a contributory, earnings-related social insurance plan. This means you contribute to it throughout your working life, and the amount you receive in retirement depends on how much and for how long you contributed.

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• Who is it for?

  • Individuals who have worked in Canada (outside of Quebec, which has the Quebec Pension Plan - QPP) and made at least one valid contribution to the CPP.

  • You must be at least 60 years old to start receiving benefits.

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• How does it work?

  • Contributions:

    • During your working years, you and your employer (or you as a self-employed person) contribute a percentage of your earnings to the CPP. There's a maximum amount you contribute each year.

  • Benefit Calculation:

    • Your CPP retirement pension amount is calculated based on your average earnings throughout your contributory period and the number of years you contributed. Service Canada looks at your entire earnings history to determine your average monthly earnings.

  • Standard Age:

    • The standard age to start receiving CPP is 65.

  • Flexible Start Date:

    • You can choose to start receiving your CPP as early as age 60 or as late as age 70:

      • Starting Early (60-64):

        • Your monthly payment will be permanently reduced for each month you take it before age 65 (by 0.6% per month, or 7.2% per year, up to a maximum reduction of 36% at age 60).

      • Delaying (66-70):

        • Your monthly payment will be permanently increased for each month you delay it past age 65 (by 0.7% per month, or 8.4% per year, up to a maximum increase of 42% at age 70).

  • Taxable:

    • CPP payments are taxable income.

  • Pension Sharing:

    • Spouses or common-law partners who are at least 60 years old can apply to share their CPP retirement pensions for potential tax savings, especially if one partner is in a significantly higher tax bracket.

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• Key takeaway for seniors:

  • CPP is an earned benefit. The more you contributed and the later you start (up to age 70), the more you receive. It forms a foundational layer of retirement income.

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Old Age Security (OAS)

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OAS is a universal pension provided by the Canadian government. Unlike CPP, you do not contribute directly to OAS. It is funded through general tax revenues.

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• Who is it for?

  • Canadian citizens or legal residents aged 65 or older.

  • You must meet specific residency requirements:

    • If living in Canada, you must have resided in Canada for at least 10 years after turning 18.

    • If living outside Canada, you must have resided in Canada for at least 20 years after turning 18. (Partial OAS is available for those with 10-39 years of residency).

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• How does it work?

  • Eligibility:

    • Most Canadians are automatically enrolled for OAS if Service Canada has enough information. If not, you may need to apply. It's often recommended to apply 6 months before turning 65.

  • Payment Amount:

    • The maximum OAS pension is paid to those who have resided in Canada for at least 40 years after age 18. If you've lived here for less than 40 years but at least 10, you receive a partial pension (e.g., 30 years out of 40 = 75% of full OAS).

  • Indexed to Inflation:

    • OAS payments are reviewed quarterly (January, April, July, October) and adjusted to reflect increases in the cost of living (Consumer Price Index), so your payment generally keeps pace with inflation.

  • Age 75+ Increase: As of July 2022, seniors aged 75 and over receive an automatic 10% increase to their OAS pension.

  • OAS Clawback (Recovery Tax):

    • This is very important. OAS is a taxable benefit, and if your individual net annual income exceeds a certain threshold (adjusted yearly, e.g., around $86,912 in 2023), you may have to repay part or all of your OAS pension. This is often referred to as the "OAS clawback."

  • Flexible Start Date:

    • Similar to CPP, you can choose to defer your OAS pension for up to 5 years (until age 70). This will permanently increase your monthly payments (by 0.6% per month or 7.2% per year, up to a maximum 36% increase at age 70). However, if you defer OAS, you (and your spouse, if applicable) will not be eligible for the Guaranteed Income Supplement (GIS) during that deferral period.

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• Key takeaway for seniors:

  • OAS is a basic income floor for most Canadian seniors, based on residency, not work contributions. Be aware of the income clawback if your income is high.

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Guaranteed Income Supplement (GIS)

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The GIS is a non-taxable monthly payment for low-income Old Age Security (OAS) pensioners. It is designed to provide additional financial assistance to seniors with little or no income beyond their OAS pension.

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• Who is it for?

  • You must be 65 or older.

  • You must be receiving the Old Age Security (OAS) pension.

  • You must be a Canadian resident.

  • Your annual income (or combined income with your spouse/common-law partner) must be below a specific threshold set by the government (these thresholds are updated quarterly and vary based on your marital status).

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• How does it work?

  • Income-Tested:

    • GIS is strictly income-tested. The more "other income" you have (e.g., CPP, private pensions, investment income, employment income), the less GIS you will receive. Your OAS pension itself is generally not counted as income for GIS calculation.

  • Non-Taxable:

    • This is a major advantage – GIS payments are not considered taxable income.

  • Automatic Renewal (Usually):

    • Eligibility for GIS is reviewed annually based on the income information from your previous year's tax return. For most, if you file your taxes every year, your GIS will automatically renew if you remain eligible. However, if your income significantly drops (e.g., due to retirement) you can inform Service Canada to get your GIS recalculated based on an estimate of your current year's income.

  • Impact of Income Sources:

    • Income from CPP, private pensions, RRSP withdrawals, employment, and investment income (excluding TFSA withdrawals) can all reduce or eliminate your GIS entitlement. This is why careful tax and income planning is crucial for GIS recipients.

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• Key takeaway for seniors:

  • GIS is a vital supplement for low-income seniors. It's non-taxable, but eligibility and the amount received are highly dependent on your other income.

 

For seniors in Ontario (or anywhere in Canada), understanding these benefits and how they interact with your other income sources is fundamental to maximizing your retirement security. It's always a good idea to consult with a financial professional who can help you integrate these government benefits into your overall financial and estate plan, ensuring you're receiving all you're entitled to while optimizing your tax situation.