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Most people don’t realize CPP survivor benefits are surprisingly modest. Further, in many households, the CPP and OAS each spouse or common-law partner collects may be a significant portion of their retirement income.

When one partner dies, the surviving spouse or common-law partner may see a precipitous decline in household income. It is essential that advisors plan for this. Here, we explain what a survivor can expect to receive under CPP.

Survivor benefit numbers

Currently, 1.1 million Canadians are receiving survivor benefits. The 27th Actuarial Report on the Canada Pension Plan, prepared as of December 31, 2015, forecasted about 77,000 new survivor pensions for 2017: 22,000 new survivors younger than 65, and 55,000 new survivors aged 65 and older.

Those 77,000 aren’t getting much. Service Canada found that for average monthly survivor pensions starting in March 2017, those younger than 65 received $429.33 (approx. $5,200 annually), whereas those 65 and older received $315.77 (approx. $3,800 annually). In comparison, a 65-year-old qualifying for maximum CPP in 2017 would start receiving $1,114.17 per month (approx. $13,400 annually).

Who’s a survivor? You’d be surprised

The survivor definition in CPP legislation says that a common-law spouse’s claim takes precedence over the claim of a spouse. A survivor is defined as a person who was the common-law partner of the contributor at the time of the contributor’s death. If there was no common-law partner, it is the person to whom the contributor was married at the time of death.

To be considered common-law, the couple must have lived together a conjugal relationship for at least one year (the partner’s gender is not germane). To access benefits, the surviving common-law partner must submit form SC ISP-3004—Statutory Declaration of Common-Law Union (Dual Signatures) or SC ISP-3104—Statutory Declaration of Common-Law Union (Single Signature). A legally married survivor will have to submit a certified copy of their original marriage certificate at the time of claim.

Here’s an example. Assume Robert had been in a common-law relationship with Amanda for at least 12 months when he died, but had not legally separated from Suzanne. Amanda as the common-law spouse would be entitled to the survivor pension.

Deathbed marriages, however, may not result in survivor benefits. If someone dies within a year of his or her marriage, and at the time of the marriage did not have a life expectancy of at least one year, no survivor’s pension is payable. Hence, survivors may have to repay survivor benefits if they cannot satisfy Service Canada as to the deceased’s health at the time of the marriage, should Service Canada later request such information. Time spent in a common-law relationship prior to the marriage will also be taken into account to see if the one-year requirement has been met.

Prior to 1987, a remarriage would have resulted in the survivor’s loss of benefits. (They could have been reinstated had the new spouse died, or had there been a divorce). This is not the case now. However, a survivor cannot receive more than one survivor pension. A person widowed a second time is entitled to the larger of the two survivor pensions.

If a couple had been sharing CPP, the sharing will cease the month after one of the partners has died. Service Canada will adjust the retirement pension to what it would have been prior to any sharing, and then calculate the appropriate survivor pension.

Survivors should apply for the benefit as soon as possible, as retroactive payments are only made for a maximum of 12 months.

Other eligibility conditions

Even though there may be an eligible spouse or common-law partner, certain other conditions must be met.

The deceased contributor must have contributed to the CPP during the lesser of:

  1. 10 calendar years, or
  2. one-third of the number of years included wholly or partly in their contributory period, but not for less than three years.

Under the second condition, if the deceased had reached age 65 but was not yet receiving CPP, and his earnings for any year was less than $3,500, that year would be excluded in the calculation.

Canada also has international social security agreements designed to co-ordinate pension programs for individuals who lived or worked in multiple jurisdictions. This may allow years in the other jurisdiction(s) to count toward the contributory period requirement.

Also, the surviving spouse or common-law partner must have dependent children, be disabled or be at least aged 35. A surviving spouse or common-law partner with dependent children means a surviving spouse who wholly or substantially supports the deceased’s child where the child is:

  • under 18;
  • aged 18 but under 25 and attending school full-time; or
  • aged 18 or over and disabled, having been disabled without interruption since attaining age 18 or at the time of the contributor’s death, whichever occurred later.

Earlier this year, a 34-year-old widow challenged CPP’s survivor age requirement. This widow was not disabled, nor did she have dependent children; her husband had died at age 38. Under the current rules, she would only be able to collect her survivor benefit at age 65. She viewed the age requirement as flawed and unconstitutional. A similar case made its way to the Supreme Court in 1999 (Law v Canada [Minister of Employment and Immigration]). Nancy Law, at the time a 30-year-old widow, did not succeed in her claim.

As for the disability requirement, under the CPP legislation, the disability must be “severe and prolonged.” “Severe” means the condition prevents the person from working regularly at any job. “Prolonged” means the condition is long term or may result in death. These are much stricter requirements than those for claiming the Disability Tax Credit. Surviving spouses who have already qualified for disability pensions will have satisfied this requirement.

As for children, Service Canada assesses whether the child is disabled. Applicants must include documentation relating to the child’s disability.

Orphan benefits

As long as the deceased contributed to CPP for the minimum period described above, it’s possible for an orphan benefit to be paid to eligible children. This is a flat benefit, which in 2017 is $241.02 per month. Double the amount will be paid if both parents die having met the contributory period requirements.

If the child is a minor, the amount is paid to whomever (i.e., person or agency) has custody and control of the child. In most cases, the surviving parent will receive the amount, as there is a presumption that this person has custody. (This would not be the case if the child lived elsewhere.)

The monthly benefit will be paid until the earlier of when the child becomes independent or dies. A dependent child is someone who is under age 18, or between the ages of 18 and 25 and in a full-time education program at a school, college or university or other institution that provides training or instruction.

The orphan benefit is indexed, and commences the month the contributor dies. If the child is not yet born, the benefit will commence the month following birth. Make sure clients submit the application on time, as benefits will be paid retroactively for one year at most.

What the survivor can expect to receive

All CPP contributors should regularly review their Statements of Contribution (SOC) for accuracy. That’s because someone applying for CPP at age 60 is unlikely to recall their earnings at age 18, which is the start of the contributory period. Check this statement when memories are fresh, as incorrect information will lead to incorrect payouts (taking her own advice, the author found an error in her own statement and contacted Service Canada to get this rectified).

As explained on the Service Canada website, the SOC is a record of a person’s pensionable earnings and contributions to the plan. It shows total CPP contributions for each year and the earnings on which the contributions are based.

There is often confusion about how much the survivor might receive because the calculation takes into account whether the survivor is receiving their own CPP retirement or disability pension. Not understanding this means contributors can overestimate their survivor pensions.

It’s also important to realize the amount of the survivor benefit shown on the SOC is a projection. It assumes that the contributory period runs to age 65, and that the survivor is age 65. It does not incorporate the fact that the survivor may be entitled to CPP retirement or disability benefits based on his or her own contributions to the CPP, which caps the entitlement.

Benefits paid if survivor is not receiving other CPP retirement or disability benefits

The formulas used for calculating the monthly survivor benefits are in Table 1. For example, a 65-year-old survivor will receive 60% of the contributor’s retirement pension. But there’s a caveat: as stated on Service Canada’s website, the 60% only applies if the surviving spouse or common-law partner is not receiving other CPP benefits.

TABLE 1: Monthly survivor benefits paid where survivor is not otherwise receiving CPP retirement or disability benefits

Under 35

Not disabled and not raising dependent children

No amount is paid until the spouse or common-law partner reaches age 65 or becomes disabled
Under 45

Not disabled and not raising dependent children

The flat rate benefit of $185.61*, plus 37.5% of the deceased’s retirement pension. There is a reduction of 1/120th for each month that the spouse or common-law partner is under 45 at the time of the contributor’s death
Under 45

Disabled or raising dependent children

The flat rate benefit of $185.61*, plus 37.5% of the contributor’s retirement pension
Age 45 to 64 The flat rate benefit of $185.61*, plus 37.5% of the contributor’s retirement pension
Age 65 or older 60% of the contributor’s retirement pension

*Flat benefit for 2017

Any post-retirement benefit the deceased may have received does not enter into the calculation of the survivor pension. Let’s assume Joe had been receiving $1,000 of CPP retirement benefits and $60 of post-retirement benefits each month. If Alexa (age 65) was not otherwise receiving CPP benefits, her survivor pension would be $600 per month (60% of $1,000). The post-retirement benefit is only paid to the contributor and is not folded into the calculation of any survivor or disability benefit.

The amounts reflected in Table 1 are based on subsection 58(1) of CPP legislation. Note that CPP benefits are indexed on January 1 of each year.

Benefits paid if the survivor receives CPP retirement or disability benefits

Calculating the survivor pension is more complex where the survivor is already receiving a retirement or disability pension; subsection 58(2) of the CPP legislation contains the applicable formulas that would apply.

We can, however, look generally at the principles. Take a 65-year-old widow, Yasmin, who is already receiving CPP retirement benefits based on her own contributions to the CPP. Assume her spouse dies in 2017, at which time the maximum CPP retirement pension would be $1,114.17 per month. In other words, her own retirement pension, plus the survivor pension, cannot be more than $1,114.17.

Unfortunately for Yasmin, we cannot calculate her combined new benefit by taking her retirement pension, adding 60% of her deceased spouse’s retirement pension, and then capping this amount at the $1,114.17 total. Service Canada will apply
the formula.

If Yasmin was already receiving CPP disability benefits, the maximum combined benefit she could receive upon her spouse’s death is the maximum CPP disability benefit. For 2017, this would be $1,313.66.

For a couple where each received near-maximum CPP retirement pensions and maximum OAS, capping the survivor benefit is financially punitive. Upon the death of one of the two, household income would decline by the amount of the OAS she was receiving. Also, instead of there being two near-maximum CPP retirement pensions, the survivor’s combined survivor and retirement benefit would approximate one maximum CPP retirement benefit.

Given the maximum monthly OAS benefit of $583.74 (Q3 of 2017) and the maximum CPP retirement benefit that could start in 2017 of $1,114.17, the loss of these two would be significant to many. In this case, the decline in annual household income could approach approximately $20,000. (The decline would be smaller where the deceased was not receiving the maximum retirement pension.)

Note that a 65-year-old survivor collecting OAS might be eligible to receive the GIS. And a survivor who is 60 to 64 years of age might qualify for the Allowance for the Survivor. However, both amounts are income-tested and many survivors will not qualify to receive them, or will receive less than the maximum amount.

As may be seen from the above, a couple could have paid in at the maximum throughout their working lives. However, upon the death of one, the most that will be paid out is one maximum retirement benefit (or disability benefit, if the survivor is collecting a disability pension).

How common is this? The 27th Actuarial Report on the Canada Pension Plan contains the marital status of contributors at the time of their death. As seen in Table 2, a 60-year-old male contributor has a 61% likelihood of leaving behind a spouse or common-law partner when he dies. Thus, there is a 61% likelihood that some survivor benefit will be paid (to a cap). However, it also means there is a 39% likelihood that no one will receive the benefit. This 60-year-old may have been contributing since age 18, but all that will be distributed from the CPP is the death benefit (a maximum of $2,500). The contributor has essentially subsidized those left in the pool.

TABLE 2: Proportion of contributors married or in common-law relationships at death

Age Males Females
20 3% 1%
30 20% 26%
40 47% 60%
50 56% 63%
60 61% 59%
70 68% 53%
80 68% 33%
90 51% 11%

Source: Office of the Chief Actuary

Advisors will want to consider whether there is any merit to having one or both partners apply for a discounted retirement benefit earlier than age 65. While a number of factors would enter into this determination, a contributor who is in poor health might want to consider an earlier benefit, as upon his or her death, their survivor (who may already be receiving their own retirement pension) would have their own pension topped up by an insubstantial survivor benefit, given the cap.

Changes to CPP legislation

Bill C-26, which amended the CPP, was passed in December 2016. The primary focus of the legislation was to enhance CPP benefits. This will be achieved by increasing the covered earnings by about 14% and by also increasing the earnings replacement from 25% to 33.3%. Survivor benefits will increase by virtue of the higher retirement benefits that will arise under the new rules. However, the system will take a considerable time to mature, so today’s survivors (and those becoming survivors in the near term) will see little change.

Summary

The CPP is one of the three pillars of Canada’s retirement income system. For an advisor to prepare a robust financial plan, CPP benefits—retirement (including post-retirement), disability and survivor—need to be incorporated in an appropriate fashion. Clients will want to know what their situation will be upon the death of their spouse or common-law partner. If advisors overstate survivor benefits in a plan, the client will be at risk.

If upon running the numbers, the survivor benefit is lower than expected, make sure that clients have adequate resources in place, including life insurance coverage. Advisors will also want to make sure that appropriate decisions are made with respect to other sources of retirement income (e.g., retirement benefits paid by RPPs continue to the survivor, annuities acquired with RRSP or RRIF funds have the appropriate guarantees) so the survivor has adequate resources until death.

Lea Koiv, CPA, CMA, CA, CFP, TEP, is a tax, pension and retirement expert who has held senior roles at a national insurer and international accounting firms. Reach her at info@leakoivassociates.ca.

Originally published in Advisor's Edge Report

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