CPP death benefit ripe for broader reform

By Michael McKiernan | August 7, 2024 | Last updated on August 7, 2024
5 min read
Protecting Hands Holding Golden Nest Egg On Wooden Table
AdobeStock / Philip Steury

The federal government’s decision to double the Canada Pension Plan’s death benefit for a small group of contributors has put a spotlight on the adequacy of the amount itself.

The standard benefit is $2,500 for people with a long enough history of CPP contributions. Following the passage of budget implementation Bill C-69, a $5,000 death benefit will be payable to certain contributors.

To qualify for the top-up, no other CPP benefits — except the orphan’s benefit — can have been paid out in connection with the deceased’s contributions.

That rules out any contributor leaving behind a spouse or common-law partner who could claim survivor benefits, as well as anyone who dies after receiving CPP payments of their own, said pension specialist Lea Koiv, president of Lea Koiv & Associates Inc. in Toronto.

“We’re talking essentially about the estates of people without spouses. Big deal,” Koiv said. “When you look at what we now pay in, $5,000 is like tossing them a bone.”

“I’m still puzzled by why the death benefit is so small,” she added, noting that the peak of the CPP death benefit came in 1997, when the maximum payment was $3,580, or one-tenth of the year’s maximum pensionable earnings (YMPE).

For 2024, with the YMPE at $68,500, a comparable death benefit would be $6,850. The figure rises if you account for the year’s additional maximum pensionable earnings of $73,200, which applies for the first time this year to those whose earnings exceed the first ceiling.

The death benefit was one of the casualties of the 1997 CPP reforms, when the maximum payment was cut to $2,500 as part of an effort to tame the pension’s finances.

As an alternative to a wide-ranging death-benefit bump, Koiv suggested the federal government exempt the payments from tax, regardless of whether the recipient gets the regular $2,500 or the enhanced $5,000 benefit.

“In most cases, the estate will pay the tax,” she said. “Where no estate return is filed, CRA allows the beneficiaries to pay the tax on the amount.”

Thuy Lam, a certified financial planner with Objective Financial Partners in Markham, Ont., called the new top-up a “good first step” on the road to a broader death-benefit enhancement.

“These people contributed, and it’s only fair that their estate, if there are no survivors, will still have access to a dignified service,” she said.

The death benefit has been stuck at $2,500 for almost three decades, Lam said, so some form of indexation is needed for the remainder of CPP contributors who qualify for the standard death benefit.

“Just being able to keep pace with inflation is a very important change that I would like to see,” she said.

Bill C-69 included several other amendments to the CPP:

  • Creation of a new child’s benefit for dependent children aged 18 to 24 who attend school part time, as long as their deceased or disabled parents contributed to CPP for the minimum qualifying period. The flat rate benefit is worth $147.06 per month for 2024, or half of the $294.12 benefit payable to dependent children in the same age range in full-time education.
  • Maintaining eligibility for the disabled contributor’s child’s benefit in cases where the disabled contributor reaches age 65. Previously, a dependent child’s entitlement was tied to their parent’s receipt of disability benefits, and disabled contributors are automatically switched from disability benefits to a CPP pension at age 65.
  • Extending the CPP’s incapacity provisions to protect the date of application for the disabled contributor’s child’s benefit. The CPP already allowed applications for disability benefits to be backdated on behalf of an incapacitated person who could have applied earlier, but there was previously no such allowance for a related application for the child’s benefit.
  • Precluding entitlement to the survivor’s pension in cases where a person has received a division of unadjusted pensionable earnings in respect of their deceased separated spouse.
  • Clarifying the determination of the payee of the disabled contributor’s child’s benefit. The CPP previously directed payments to be made to the person or agency with “custody and control of the child.” The updated version provides for payments to be made to the person or agency with “decision-making responsibility” for the child, reflecting recent changes to terminology in the federal Divorce Act.

Lam said a common thread runs through all the CPP changes included in the budget.

“They don’t necessarily impact a large proportion of the population,” she said. “But they do make a big impact on those who are affected.”

Matthew Ardrey, portfolio manager and senior financial planner with TriDelta Private Wealth in Toronto, agreed, saying relatively few financial planners will be dealing with affected clients on a day-to-day basis.   

“These are targeted for the most part at a group of people who are probably more vulnerable than the average Canadian,” he said.

Ardrey welcomed the changes extending eligibility for the child’s benefit, noting that his own book includes parents in their 60s with dependent children.

“I think it makes sense to expand that out,” Ardrey said. “People are having kids at all sorts of different ages.”

Koiv said the effect of the amendments barring entitlement to a survivor’s pension to some separated spouses will vary across the country, since some provinces adopt a different approach to the splitting of CPP credits on separation. In most provinces and territories, credit splitting is mandatory, but in B.C., Alberta, Saskatchewan and Quebec, separated couples can waive their rights.

Still, even in jurisdictions where credit splitting is optional, many separated couples will have applied to do so, precluding them from claiming a survivor’s pension when their ex dies. 

“They will benefit from having their own retirement pension increased on account of having split the pension credits,” Koiv said.

Ben Margles, who provides wealth advisory support at Wealth Stewards in Toronto, said many Canadians’ knowledge of the CPP is confined to its core retirement benefits, meaning the recent amendments deal with coverage they may not be aware of. Despite the eligibility extensions and benefit improvements laid out in the budget, he encourages his firm’s clients to look beyond the CPP when planning.  

“The CPP is supposed to provide a base level of coverage, so it’s not something you can quite rely on to cover all of your expenses,” he said. “Families who haven’t planned ahead are left to shoulder that financial burden, while also dealing with the emotional and mental challenges that come with death or disability.”  

All CPP changes passed in C-69 will come into force once seven provinces, representing at least two-thirds of the population, have provided their formal consent.

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Michael McKiernan

Michael is a freelance legal affairs reporter who has been covering law and business since 2010.