Mandatory retirement at a specific age is no longer regarded as legal in Canada unless an employer can establish it is a bona fide occupational requirement.
Once an employee does decide to retire, retirement income may be provided through both public and private plans:
a) Public Retirement Plans
Public pensions are provided through the Canada Pension Plan and the Quebec Pension Plan. These are funded through contributions from both the employer and the employee. Employers are required to deduct contributions from employee’s pay and remit them to the government together with a matching contribution from the employer.
Contributors are entitled to a full pension at age 65 and an actuarially reduced pension at age 60.
Both the Canada Pension Plan and the Quebec Pension Plan also provide for the following supplementary benefits:
- Disability pension
- Surviving spouse’s pension
- Disabled contributor’s child benefit
- Orphan’s benefit
- Death benefit
Inflation protection is provided through a pension index which is geared to the consumer price index.
b) Private Pension Plans
Private pension arrangements are usually provided through a registered pension plan or other form of employer-sponsored pension plan such as a group registered retirement savings plan.
If a pension plan is registered under the Income Tax Act, contributions to it by both the employer and the employee are deductible from their taxable income and income tax is not payable on the investment income until it is paid out as benefits.
There are two main types of registered pension plan: the defined benefit pension plan and the defined contribution pension plan.
Eligibility requirements must be based strictly on years of service. They may be contributory or non-contributory. A non-contributory pension plan is more expensive for an employer, but simpler and less expensive to administer. Arrangements must be made to have a proper administrator for the plan to ensure that proper financial management of the plan is conducted. Each province and Canada has its own pension benefits legislation.
Employers may also provide employees with a group RRSP which is administered by a financial institution.
Some employers provide supplementary employment retirement plans for their employees. These plans are designed to supplement the retirement income of employees. They are usually reserved for senior executives. They allow a company to provide these employees with a retirement income over and above the maximum limits provided under the Income Tax Act.