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By Julie Cazzin with Andrew Dobson
Q: I retired in July 2022 and was fortunate enough to have a number of stock options and shares from the company I retired from, but they were not liquid at that time. I had up to one year to sell them. The company went public early in 2023, so I was able to sell all the shares and options in the first and second quarters. My understanding is that this will be deemed employment income for 2023, so I will have to pay both the employee and employer portion of Canada Pension Plan (CPP).
I am wondering if it makes sense to start collecting CPP before 2023 ends and will that avoid or reduce having to make those CPP contributions? Service Canada shows that I will receive maximum CPP benefits. Since I will be 61 shortly, I know the payments will be reduced by about 25 per cent. I am good with that as I will be managing my registered retirement savings plan (RRSP) withdrawals up to the age of 71 to maximize Old Age Security (OAS) and CPP along with the defined-benefit pension I am also fortunate enough to have. — Ron
FP Answers: It sounds like you lucked out, Ron, by being able to exercise your stock options after you retired. Some companies have relatively short, accelerated expiry periods of 90 days. Other companies may allow a retiree to keep their original expiry date, often 10 years from the option grant date, subject to certain conditions.
As you note, stock option proceeds are considered employment income. Stock options benefit from special tax treatment given that only 50 per cent is taxable up to certain limits, so they are taxed like a capital gain. But the income is reported as employment income.
Employment income is generally “pensionable” and subject to CPP contributions, especially when you are under age 65. With the exception of private company shares, stock option income should be dealt with at source with payroll deductions such as income tax and CPP contributions. So, given these were publicly traded shares, Ron, you probably had CPP contributions deducted from the proceeds.
As an employee, your employer would have paid the employer CPP contributions, and you would have paid the employee CPP contributions. For 2023, that would have been $3,754.45 each if the option proceeds exceeded $66,600. As a result, you cannot opt out of paying those contributions.
Once an employee is 65, they may be able to opt out of CPP contributions. But at your current age of 61, Ron, and based on the nature of the income, CPP is a requirement, not an option.
Whether you start your CPP before the end of the year or not will make no difference. The timing of your CPP should be dependent on other factors, especially your life expectancy.
If you have health issues or a family health history that could lead to a shorter-than-average life expectancy, you should be more motivated to start CPP. If your health is good or you have a long family history of living to a ripe old age, there may be a benefit to considering CPP deferral. CPP can be deferred as late as age 70.
The later you defer CPP, the more your monthly payments will be. You may need to wait longer to get the income and draw down your RRSPs in the meantime, but if you live well into your 80s, you may be better off waiting and receiving higher CPP payments.
You will have a similar timing decision to make with OAS at age 65. It can start at 65, but deferring it to as late as age 70 and getting an increased monthly payment is an option.
You mentioned you have a DB pension. If you already have a relatively high DB pension, that may provide good longevity protection if you live a long life. If you are on the fence about CPP, the higher your DB pension is, the more beneficial it may be to consider starting CPP early. If your DB pension is small, or for someone else with little to no DB pension income, CPP deferral is that much better to consider if you are healthy.
Retirement funding requires planning, so it is good to take the time to figure out the timing of pensions and the timing and magnitude of withdrawals from your various accounts. It may help you boost your retirement income, pay less tax in the future or maximize your estate.
Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at email@example.com .