A Guide to Retiring in Canada
Embarking on a journey towards retirement in Canada requires careful consideration and proactive financial strategies. In this guide, we will explore various elements of retirement planning in Canada, offering insights into pension programs, savings options, and employer-assisted plans.
Old Age Security Pension (OAS)
The Old Age Security (OAS) pension is a taxable monthly payment from the Canadian government, designed to provide a foundational income for seniors aged 65 or older.
Unlike the Canada Pension Plan (CPP), OAS is not based on your work history. Eligibility is determined by residency. To receive a partial pension, you must have lived in Canada for at least 10 years after age 18. To receive the full OAS pension, you generally need to have lived in Canada for 40 years after age 18. OAS is intended as a safety net for those with lower to moderate incomes. If your individual net income in retirement is too high, you must repay part or all of your OAS benefit.
OAS payments are adjusted quarterly for inflation and are higher for older seniors. For July to September 2025 the rates are as follows:
- Ages 65 to 74: The maximum monthly payment is $734.95.
- Age 75 and over: The maximum monthly payment is $808.45.
You can choose to start receiving your OAS pension at age 65, but you don’t have to. You can voluntarily delay your first payment for up to five years (until age 70). For every month you delay, your monthly pension payment will be permanently increased, providing a significantly higher income stream for the rest of your life. There is no benefit to delaying past age 70.
Canada Pension Plan (CPP)
The Canadian Pension Plan (CPP) is a significant component of Canada’s retirement income system, providing financial support to eligible individuals during their retirement years. Quebec administers a separate pension plan (QPP), which replaces CPP in that province. Administered by the federal government, the CPP aims to ensure that Canadians have a stable and reliable source of income when they retire.
Eligibility
To be eligible for CPP (or the similar QPP in Quebec), individuals must work and earn income in Canada during some part of their career. All Canadian workers are required to contribute to CPP from their wages between the ages of 18 and 70, which is shown as a specific line-item on their pay stubs. To get the maximum CPP benefits, a person needs to contribute for at least ¾ of those years (so 39 years), but partial benefits can be claimed if you contributed for as little as ¼ of the total time (so 13 years).
Benefits
Retirement Pension
Think of CPP as a pension you earn by working. It’s designed to replace a portion of the income you were earning.
- Your Choice: You have flexibility. You can take a permanently reduced pension as early as age 60, the standard pension at 65, or a permanently increased pension by waiting as late as age 70.
- How you qualify: Throughout your career, you and your employer both contribute a small percentage of your paycheque to the CPP. The amount you receive in retirement is based on how much you contributed over your lifetime.
- Key Feature: The more you earn and contribute (up to an annual limit), the higher your future pension will be.
Starting in 2024, the Canada Pension Plan was enhanced with a new, second tier of contributions for higher-income earners. This is sometimes referred to as “CPP2.”
Once your annual income passes the first maximum pensionable earnings limit (the YMPE, which was $68,500 in 2024), you will begin paying into this second tier. You contribute at a lower rate (4%) on the portion of your income that falls between the first and the new, higher second earnings ceiling.
If you earned $80,000 in 2024:
- You would make your standard CPP contributions on income up to $68,500.
- You would then make additional CPP2 contributions at a 4% rate on the income you earned between $68,500 and $73,200.
- Any income you earned above $73,200 would have no further CPP or CPP2 contributions deducted.
The goal of this enhancement is to increase the future retirement pensions for Canadian workers, allowing the CPP to replace a larger portion of their pre-retirement income.
Disability Benefits
The CPP also offers disability benefits for individuals who are unable to work due to a severe and prolonged disability. To be eligible, applicants must have contributed to the CPP for a minimum period.
Survivor’s Pension
Upon the death of a CPP contributor, their surviving spouse or common-law partner), as well as their children, may be eligible for a survivor’s pension. The amount is based on the deceased contributor’s contributions and is provided to the surviving partner.
Work While Receiving Pension
Individuals can continue working while receiving the CPP retirement pension, contributing additional amounts and potentially increasing their pension amount through post-retirement benefits.
Tax-Free Savings Account (TFSA)
The Tax-Free Savings Account (TFSA) is a flexible and popular savings vehicle in Canada that allows individuals to grow their savings and investments without incurring tax on the income generated within the account. Introduced in 2009 by the Canadian government, the TFSA provides Canadians with a tax-efficient way to save for various financial goals.
With a TFSA, you pay income tax on the income when you earn it, and deposit it into your TFSA. Then when you retire, you can withdraw from the TFSA, with any gains (from investments or interest income) being tax-free.
Eligibility and Contributions
Any Canadian resident who is 18 years of age or older is eligible to open and contribute to a TFSA. The contribution room accumulates annually, regardless of income. The annual contribution limit is set by the government and is the same for all eligible individuals, at $7,000 (for 2024 to 2026). Some unused contribution room carries forward to future years – so if you do not immediately start building a TFSA when you turn 18, there is some room to “catch up” later.
If you try to contribute more to a TFSA than is allowed in the “contribution room”, you get charged a heavy penalty each month until you are back down below the limit.
A great strategy for accumulating wealth in a TFSA account is to start contributing at an early age and to set-up automatic monthly payment contributions, even if the amount is small.
Types of Investments
TFSAs offer a wide range of investment options, including savings accounts, Guaranteed Investment Certificates (GICs), stocks, bonds, mutual funds, and Exchange-Traded Funds (ETFs). The choice of investments depends on the individual’s risk tolerance and financial goals.
Withdrawals
Withdrawals from a TFSA do not permanently reduce the contribution room. The amount withdrawn can be recontributed in future years, providing flexibility in managing financial needs. One example of this is “borrowing” from a TFSA for the down payment to buy your first home, then being able to “pay back” that later.
Estate Planning
TFSAs allow individuals to designate beneficiaries – who, specifically, should inherit the TFSA (and how much of it). In the event of the account holder’s death, the TFSA assets can be transferred to the named beneficiaries without going through probate (the lengthy court process where next-of-kin is determined), facilitating efficient estate planning.
Registered Retirement Savings Plan (RRSP)
The Registered Retirement Savings Plan (RRSP) is a tax-advantaged savings and investment account in Canada designed to help individuals save for their retirement. The RRSP was introduced by the Canadian government to encourage citizens to build financial security for their retirement years.
RRSP vs TFSA
An RRSP has many similarities with a TFSA, with the main difference in how taxes are handled. With a TFSA, you pay the income tax now, and the withdrawals later are tax-free. With an RRSP, contributions are deducted from your taxable income now, but you pay tax on withdraws later.
Borrowing From An RRSP
In the TFSA example, we said that a person can “borrow” from the TFSA to buy their first home. But there is no strict requirement to pay it back – it just increases the amount you can re-contribute to the TFSA later.
With RRSPs, the same idea applies. However, when you contribute to an RRSP you get a tax break (your contributions are reduced from your taxable income), so there are more restrictions on what exactly you can do with anything you withdraw.
Some examples include the Home Buyer’s Plan (HBP), where you can borrow from your RRSP for the down payment for your first home, or Lifelong Learning Plan (LLP), where you can borrow against your RRSP to pay for education expenses if you decide to go back to school. But these are different from the TFSA in that you MUST pay back the amount you borrowed over a specified period of time, or you will take on tax penalties.
Employer Retirement Assistance
In Canada, employer-sponsored retirement assistance typically takes the form of workplace pension plans and employer-sponsored savings programs. These offerings are designed to help employees save for their retirement and often involve contributions from both the employer and the employee. Here are key aspects of employer retirement assistance in Canada:
Workplace Pension Plans
Defined Benefit (DB) Pension Plans
In a defined benefit pension plan, retirees receive a predetermined pension based on factors like years of service and salary. It is counted like regular income from a job, and is taxable in retirement. Employers bear the investment risk and contribute to the plan to ensure that retirees receive the promised benefits. These types of plans are becoming increasingly rare.
Defined Contribution (DC) Pension Plans
In a defined contribution pension plan, both employers and employees make contributions to individual accounts. The ultimate pension benefit depends on the performance of the invested funds. Employees assume the investment risk, but because the employer contributes some “matching” amount, it is usually a better investment than a regular RRSP or TFSA, since the employer’s contribution is “free money” for the employee. DC plans usually act more like an RRSP than TFSA – you do not pay tax on the contributions to the fund, but you are taxed when you withdraw the funds in retirement.
Group Registered Retirement Savings Plans (Group RRSPs)
Group RRSPs are employer-sponsored savings plans that function similarly to individual RRSPs. Employers set up these plans for their employees, and both employers and employees can make contributions. Contributions are tax-deductible for employees, and the investments grow on a tax-deferred basis.
Deferred Profit Sharing Plans (DPSPs)
DPSPs allow employers to share profits with employees through contributions to a retirement savings plan. The contributions are not deducted from employees’ salaries, and they accumulate on a tax-deferred basis until withdrawal.
Employee Share Ownership Plans (ESOPs)
ESOPs involve employees acquiring ownership shares in the company. While not specifically retirement plans, ESOPs can contribute to employees’ long-term financial well-being. As employees gain ownership, they may benefit from the company’s success.
Pooled Registered Pension Plans (PRPPs)
PRPPs are relatively recent additions to the retirement savings landscape in Canada. They are designed to make it easier for small to medium-sized businesses to offer a retirement savings option to employees. PRPPs pool the savings of multiple employers and their employees.
Vesting Periods
Some retirement plans may have vesting periods, during which employees must remain with the company to be entitled to the employer’s contributions. Vesting periods help employers retain talent and incentivize long-term employment.
Conclusion
Besides the OAS and CPP/QPP, the mix of sources of retirement income can, and does, vary widely from person to person. Every Canadian needs to know the advantages and disadvantages of TFSA vs RRSP accounts, and balance this with any Employer Retirement Assistance programs that are available at their place of work.