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FIN 612
Coleen Clark

Chapter 3: Govt Pension Plans 1. Does earned income for CPP contributions include dividend income? (pg 121)  Earned income for CPP inclu: salary, self-employed income after operating exp, commissions o employer matches the contribution made by the employee o self-employed taxpayers - pay employee and employer contribution  therefore not include dividend income 2. What is the maximum pensionable earnings? (pg 121 & 122)  pensionable earnings - amt of annual earnings which employee and employer pay CPP contributions  maximum amount of pensionable earnings = yearly maximum pensionable earnings (YMPE) - max amount of income which one pays CPP contribution → generic earnings amt = $46,000 3. What is the amount of Jamie's CPP contribution using generic rates if his earned income is: (pg 122 & 123) a) $48,000 o annual contribution = (contribution rate)(pensionable earnings) = (contribution rate on Table 3.4 on pg 123)[(lesser of YMPE or earned income) - Yr's basic exemption) = (4.95% generic)(46000 - 3500) = 2103.75 b) $32,000 o annual contribution = (contribution rate)(pensionable earnings) = (contribution rate on Table 3.4 on pg 123)[(lesser of YMPE or earned income) - Yr's basic exemption) = (4.95% generic)(32000 - 3500) = 1410.75 4. What is the steady-state financing rate for: (pg 123 & 124)  Steady rate financing - contribution rate increased more rapidly in the S-T to build up the reserve and then stabilized o steady-state rate = 4.95% Chapter 3: Govt Pension Plans o combined steady-state rate = 9.9% a) 2003? o 4.95% b) 2005? o 4.95% c) 2010? o 4.95% 5. If Jamie's earned income were $48,000 and the year's basic exemption was at 2008 levels, how much will Jamie's CPP contribution be in: (pg 123) a) 2002? o annual contribution = (contribution rate)(pensionable earnings) = (contribution rate on Table 3.4 on pg 123)[(lesser of YMPE or earned income) - Yr's basic exemption) = (4.7%)(39100 - 3500) = 1673.20 b) 2007? o annual contribution = (contribution rate)(pensionable earnings) = (contribution rate on Table 3.4 on pg 123)[(lesser of YMPE or earned income) - Yr's basic exemption) = (4.95%)(43700 - 3500) = 1989.90 c) 2012? o annual contribution = (contribution rate)(pensionable earnings) = (contribution rate on Table 3.4 on pg 123)[(lesser of YMPE or earned income) - Yr's basic exemption) = (4.95%)(46000 - 3500) = 2049.30 d) What assumption do you have to make to calculate the amounts for 2012? Chapter 3: Govt Pension Plans o ?? 6. Canada pension contributions are based on "pensionable earnings." The pension benefit is intended to be about what percentage of these pensionable earnings? (pg 124)  CPP retirement pension - this benefit designed to replace approx 25% of pensionable earnings adj for inflation 7. If a taxpayer has paid the maximum for the required number of yrs, at what age does he or she qualify for the full (max) pension, whether or not still earning a substantial income? (pg 125)  retiree can collect a full or partial CPP pension if he or she has made at least on contribution to the plan and is at least 60 yrs old whether or not the person is still working 8. If you are collecting the CPP pension, are you required to make CPP contributions if you are: less than 65 yrs old?, 65 or older? (pg 125 = pg 3 on corrections)  if you are less than age 65 and are still working: you must contribute  if you are less than age 65 and are not working: you can not contribute 9. Janet is 62, and has worked all of her adult life. She has had several contract positions drafting legislation and implementing new govt programs such as Pay Equity and the Office of the Ombudsman. However, she is now finding it increasingly difficult to find work, so she is considering retirement. She might then look for some part-time work, and live off that and her RRSPs and govt pensions. (pg 1 on corrections) a) If Janet qualifies for a full CPP pension at age 65, what percentage and what dollar amount would she receive if she took the CPP pension on her: (pg 125 = pg 1 on corrections) i. 62nd birthday? • $ receive if took CPP pension early = [yearly expected CPP retirement income][ 1 - (# months before retirement)(reduced by 0.6%)] = [11500][1 - (36)(0.006)] = [11500][78.4%] = 9016 ii. 69th? • $ receive if took CPP pension late = [yearly expected CPP retirement income][ 1 + (# months before retirement)(increased by 0.7%)] Chapter 3: Govt Pension Plans = [11500][1 + (48)(0.007)] = [11500][133.6%] = 15364 b) If she takes the pension now, will it go up when she turns 65? (p 125) o No b/c that means she took an early retirement which results in a reduced CPP pension c) How long does Janet have to change her mind and stop her CPP pension if she should get a job? o before age 65 d) How can Janet find out how much CPP she would get? o PV of CPP e) Janet's husband is receiving a partial CPP pension, and she can give him part of her CPP pension, since hers is more. What is this called? (pg 127) o pension sharing or assignment - sharing of CPP pension for spouses and common-law partners who are living together (not separated or divorced) • amt of pension shared based on:  length of contributory period  length of time of cohabitation • both spouses must be at least 60 yrs old and receiving the CPP pension if both contributed • if only one contributed, the CPP pension can also be shared f) If Janet's partner is a woman, could she share her pension? (pg 127) o Yes b/c common-law partners but must have relationship for at least 1 yr g) Janet's husband is not yet collecting the CPP pension b/c he is still working full time. Would she want to share her pension with him to reduce her taxes? o Probably not since his taxable income is probably already higher than hers. This might save her taxes but, depending on his income and her other income, the change in total tax payable between them might not be favourable. h) If Janet has been married for 1/3 of her contributory period, how much of her pension can she share? If her pension is $9800, while her husband's is $8600 (for a total of Chapter 3: Govt Pension Plans $18400), and he has been married for 36% of his contributory period, how much would each receive? (pg 128) Total Janet Husband % that can be shared 33.33% 36% CPP pension - total $18400 $9800_________________ $8600______________ __ CPP to split 6362.34 3266.667 3096 50% of Janet to 0 (3266.67)(50%) = (1633.33) husband 1633.33 0_____ 1548__________________ 50% of husband to (3096)(50%) = 6362.66 3181.33 Janet (1548)____ Total each 12037.3 (9800 - 3266.67) = 6533.34 3181.33 4 Amt not split 3181.33 + 6533.34 = 8600 - 3096 18400 9714.67 =5504______ Total taxable CPP pension 3181.33 + 5504 = 8685.33 10.Mary is 64 and currently receiving the maximum CPP disability benefit. (pg 128) a) How much does she receive annually? (pg 121 Table 3.3) o $14,000 b) If Mary has a son who is 23 and attending university full-time, how much will he receive annually? (pg 121 & 128) o $2714 o Children's benefit - paid to dependent children of ppl receiving CPP disability benefit • children must be:  less than 18 yrs old → paid to person with whom child lives with = benefit taxable or  between 18 and 25 and in school full time → benefit paid directly to child c) What and how much will she receive when she turns 65, including OAS? Chapter 3: Govt Pension Plans o disability benefit stops: at age 65 when the CPP pension starts (or between age 60 and 65 if early retirement is taken) or upon death o CPP disability benefits end: when a person turns 65. The person begins to collect the retirement pension. The drop in CPP benefits is more than offset by the receipt OAS benefits Age 64 Age 65 CPP 14,000 → Table 11,500 → Table 3.3 3.3 OA S 0_____ 6400__→ Table 3.6 Tota 14,000 l 17900 11.Mark and Grace are 66 and retired. Grace dies, leaving Mark frantic as to how he will get along financially without her. Grace was receiving the maximum CPP pension, while Mark is collecting 90% and the OAS (but not GIS - they have rental income). (pg 129 & 121) a) If Mark were eligible to receive the full survivor benefit, how much would it be, and what percentage is it of the retirement pension? o Survivor's benefit - monthly benefit paid o the contributor's surviving spouse or common-law partner. • If the deceased contributor and the spouse were legally separated but not divorced and the deceased had no common-law partner, the surviving spouse may be able to collect this benefit. • if deceased died after Jan 1, 1998, a same-sex surviving partner may be eligible to collect • if the survivor is 65 yr of age or older, the maximum benefit is 60% of the deceased's pension. o Table 3.3: Survivor (age 65 and over) = $6900 b) How much survivor benefit can Mark collect, given that he is receiving 90% of the full CPP pension? (pg 121) o survivor benefit can collect = (retirement pension)(1 - % of full CPP pension) = (11500)(1 - 0.9) = 1150 Chapter 3: Govt Pension Plans c) Mark will also receive another benefit upon her death. What is it, and how much is the maximum? (pg 129) o death benefit - one time pmt • benefit is 6 months of retirement pension to a max amt = $2500 • the pension is the amt actually being paid or what it would have been had the contributor been 65 when death occurred d) If Mark marries Theresa, can he continue to receive the survivor benefit? (p 129) o survivor's benefit and children's benefit both continue even if the surviving spouse remarries 12. Is the OAS pension indexed to inflation? How does this work? (pg 130)  indexed quarterly using the consumer price index (CPI) to measure cost-of-living changes  the adj for inflation occurs 4 times a yr although it doesn't reduce the benefit if the cost of living falls 13. Is the OAS taxable? (pg 132)  OAS pension is considered taxable income  subject to a special
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