Q: I am employed in the USA with a good income. I will be 67 in May 2017. Can I collect my Canadian CPP and OAS? I am also currently collecting my U.S. Social Security.
A: Canada Pension Plan (CPP) benefits are based on a worker’s history of contributions and are always payable in retirement, Brian, regardless of where you live. The same goes for Quebec Pension Plan (QPP) contributions.
Which of those two interrelated pensions you apply to and which of them pays you depends on the province in which you last lived. Apply to QPP if you lived in Quebec and CPP if you last lived anywhere else in Canada before moving to the U.S.
Old Age Security (OAS) benefits are payable based on residency history in Canada. Unlike CPP/QPP, Canadians do not contribute to the OAS. There is a minimum residency requirement of 20 years after the age of 18 to receive benefits while outside of Canada, however. So your eligibility, Brian, will be based on whether or not you meet that minimum residency criterion.
U.S. Social Security has a minimum of its own, which is 40 quarters or 10 years of contributions. Many Canadians who have worked short stints in the U.S. do not qualify, despite having contributed.
There is a Canada-U.S. Totalization Agreement that may help cross-border workers. U.S. Social Security will credit Canadians for their past CPP/QPP contributions and U.S. Social Security can also count towards OAS eligibility. Ideally, an applicant should complete an Application for Old Age, Retirement and Survivors Benefits Under the Agreement on Social Security Between Canada and the United States when they apply for their pensions. But it is possible to apply after the fact for totalization to have cross-border contributions or residence credited accordingly.
If you receive CPP/QPP or OAS while living in the U.S., Brian, there will be no income tax withholding at source as a result of provisions in the Canada-United States Convention With Respect To Taxes. Additionally, only 85% of your pensions are taxable in the United States on your 1040 tax return, due to a 15% exclusion.
Best of all, these Canadian source pensions can be paid by Service Canada (CPP/OAS) or Régie des rentes (QPP) directly to a U.S. bank account in U.S. dollars based on the current foreign exchange rate.
You may have heard about OAS clawback. There are the drawbacks from collecting OAS and having a high income. Currently, income exceeding $73,756 for the 2016 tax year causes a reduction in OAS benefits, to the tune of 15 cents on the dollar in excess of this threshold. However, OAS clawback does not apply for a Canadian non-resident like you, Brian. So despite your high income, you’re not at risk.
If you return to Canada someday, your Social Security pension will be free from IRS tax withholding in the U.S., but will be taxable on your Canadian tax return with the same 15% exclusion that applies to CPP/QPP/OAS in the U.S.
You should note, Brian, that it may be worthwhile deferring your CPP/QPP and/or OAS pensions. You can start Social Security anytime between age 62 and 70 and the “full retirement age” in the U.S. is currently 66. I suspect that’s why you’re already collecting this pension. For CPP/QPP, you can start anytime between 60 and 70 and OAS is between 65 and 70.
Traditionally, the “full retirement age” for CPP/QPP and OAS has been 65. But the pensions rise with each year that you defer them. For CPP/QPP, for each month after the age of 65, your pension calculation is increased by 0.7%. That’s 8.4% for each year of deferral. The increase for OAS is a bit less – 0.6% monthly or 7.2% annually.
Despite the temptation to take CPP/QPP or OAS at the “typical” age or taking them now simply because you’ve started your Social Security, you could benefit from waiting, Brian. But the fact of the matter is, you’re entitled to your CPP/QPP and as long as you lived more than 20 years in Canada after the age of 18, you’ll get your OAS too.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.