I learned something new the other night in a conversation with family. It is a common situation for one spouse to quit working to raise young children. And in Canada, if a spouse leaves the work force or reduces their income for a period in their life to raise young children, they may qualify for the Child Rearing Drop Out (CRDO) allowance within the Canadian Pension Program (CPP). The CRDO allows one or the other spouse to remove the period/s of child rearing and no income years from the CPP calculation, which will result in higher monthly CPP payments. This allowance applies towards any child from birth date until age 7, and to any child born after 1958.
Per the CPP plan overview in the government of Canada website, in order to be eligible for CRDO, you must meet these requirements, quoted from the government website.
you had children born after December 31, 1958
you had lower earnings because you were the *primary caregiver of a dependent child under the age of 7
You or your spouse or common-law partner received Family Allowance payments or qualified for the Canada Child Benefit (even if you did not receive the benefit)
*The primary caregiver is the person who was most responsible for the day-to-day needs of the children for the specified periods.
If you qualify, the months where you had lower or no income during child raising will not be included when calculating the base component of your CPP benefit. This means you will recieve pension credits for the period you were raising young children, and these credits will be used in calculating the enhanced component of your CPP benefit, if the credits are higher than your actual earnings. The credits are based on the average earnings in the 5 years prior to the birth of your first child. These provisions help protect the value of your CPP benefits in periods you were unable to work, or fully work, while caring for and raising young children.
The child-rearing provisions could also help you qualify for a CPP disability benefit, should you need it. In the event of your death, it could also help you meet the contributory requirements to give benefits to your estate and survivors.
This benefit will not be automatically applied to your CPP payments. You have to apply for it. But not to worry, you can apply for the CRDO either before or after you recieve CPP and it is fully retroactive. I read that Service Canada will notify you of the possibility for you to claim the CRDO upon your application for CPP, but it is good to be aware of this benefit none-the-less. You have the option to fill out forms and mail them in, or apply online through your My Service Canada Account. You can go to the following website to review the government information on this program and to find the forms.
I haven’t worked it out yet, but I will before we apply for CPP. If you are starting a family, and want to make use of this benefit in the future when you claim CPP, you need to make sure you meet the requirements above, and worked an adequate amount of time before leaving the workforce or before reducing your hours due to child rearing.
There are pretty comprehensive articles of the CRDO in the website “retirehappy.ca ”. There are different situations and ways it pays off, and some complications and downfalls if you have separated or divorced. Rather than explain it all, I am just going to add the links to the articles below for your own reading. They also provide many good, hypothetical examples..