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What you need to know about Canada Pension if you stayed home to raise children

The Canada Pension Plan (CPP) provides a monthly retirement pension to eligible Canadians.  To qualify for CPP, eligible Canadians must have worked in Canada and made valid contributions to the Canada Pension Plan during their working years.

The amount of Canada Pension Plan monthly benefit you are eligible for at retirement depends on how much you contributed to the plan while you were working, the length of time you contributed, and when you start drawing the retirement pension.

You and your employer each contribute a portion of your income to CPP on an annual basis.  Your contribution amount is relative to your income up to the yearly maximum CPP will allow.

As a general rule of thumb, the more money you make and contribute while you are working (up to the annual maximum), and the longer you wait to draw Canada pension, the higher your calculated monthly retirement benefit amount will be.

This formula works well for many people who continue to work and earn money at a steady and growing rate throughout their career, but what about a stay at home mom or dad?  

Caring for your children often means leaving the work force, or working fewer hours. If you stayed home, or worked fewer hours so you could raise your children, you will naturally have less contributions toward your Canada Pension plan than if you had worked full time and contributed fully into CPP during those same years.  For the stay at home parent, this leads to a lower CPP pension payment in retirement.

What you need to know if you took time off to raise your children, is that CPP includes a benefit called the Child Rearing Provision which protects a caregiver’s retirement benefits from some of the effects of these lower years.  The Child Rearing Provision helps to compensate the individual for periods during the child rearing years.  The provision allows a drop-out of the lowest income earning years.

The provision allows a drop-out of the lowest income earning years while caring for children.  Dropping these years from the formula may help increase the value of your monthly CPP benefits.

If you had low to no income during the years when you cared for a child under the age of seven, the Child Rearing Provision allows you to remove these years out of the calculation.  Dropping these years from the formula may help increase the value of your monthly CPP benefits.

If you were the primary caregiver of a child under the age of seven, born after December 31st 1958, and you were eligible for Family Allowance or Canada Child Tax Benefit, you should submit an application for the provision upon applying for CPP.   You will need your child’s Social Insurance Number, and if that is not available then you must provide proof of birth for each child listed.

You can find more information online on the Service Canada website.  There is an Information Sheet for the Child Rearing Provision for Canada Pension Plan which outlines more details on eligibility and documents required to submit an application to exercise the provision.  Please note this does not automatically happen; you must apply to have the provision applied.

Column appeared in June 2019 edition of This Month in Elgin

Stephanie Farrow, BA., CFP., Stephanie has over 26 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation.  Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010.  Stephanie and her husband own Farrow Financial Services Inc.  About our Farrow Financial Team.

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