The Canada Revenue Agency (CRA) made Canada Pension Plan (CPP) contributions mandatory to ensure every Canadian has a basic income for food, medicine, and utilities during retirement. If you have a mortgage or debt to pay off, CPP may not suffice. Do not rely on the maximum CPP payment, which is $2,034.86 in 2025, as the CRA has many ways to reduce these payments.
| Particulars | Age 60 | Age 65 | Age 70 |
| Maximum CPP Payout in 2025 | $917.12 | $1,433.00 | $2,034.86 |
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Four CRA traps that could reduce your CPP payments
The CRA calculates the CPP payout based on your CPP contributions in the best 39 years of your working life. Only if you max out on CPP contributions in 39 years do you stand a chance to get the maximum CPP payout.
Trap #1: Pensionable earnings
To max out on CPP contributions, you should have maximum pensionable earnings, which means income from employment or business. If you are a small business owner who has been paying yourself more dividends than salary, your CPP contribution is low, as dividends are not pensionable earnings. CPP is not deducted from dividends and other investment income.
Trap #2: Option to collect CPP payments at age 60
Another trap is waiting till age 70 to get the maximum CPP payout. The ideal age for collecting CPP payout is 65. To discourage early claims, the CRA permanently reduces the CPP payout by 0.6% for every month of early claim. If you claim at age 60, your CPP payments are reduced by 36%. To encourage people to stay in CPP, the CRA increases the payments by 0.7% for each month of delay up to age 70.
Despite this, many Canadians claim CPP at age 60, as per a 2020 report from the Toronto Metropolitan University’s National Institute.
Trap #3: CPP payments are taxable
If you are eligible to earn the maximum CPP, you are from a slightly higher income bracket. In 2025, a person with pensionable earnings of $81,200 will have the highest CPP contribution. If your earnings are higher, your standard of living will also be higher, and you may not depend solely on CPP for retirement. If you get the maximum CPP payment, you will probably pay a higher tax, as the CPP payout is taxable. The 2025 maximum CPP payment is before tax.
Trap #4: OAS clawback
An indirect way the CRA reduces your retirement benefits is by adding an income threshold. If you receive maximum CPP payments, there is a chance that you may not receive maximum Old Age Security (OAS) and Guaranteed Income Supplement (GIS). The CRA claws back OAS if your income exceeds the threshold, which is $93,454 for 2025.
TFSA pension income: A tax-free CPP alternative
You can consider building a Tax-Free Savings Account (TFSA) pension. It can help you navigate the above CRA traps and maximize retirement benefits.
1. TFSA income need not be a pensionable earning. You can contribute income earned from any source into your TFSA to earn investment income — dividends, interest, and capital gain.
2. There is no age restriction on when you can collect TFSA income. You can collect it at age 40 or 70.
3. You do not add TFSA pension to your taxable income, which means the after-tax pension is the same amount you withdrew from TFSA.
4. TFSA income is not calculated when determining the OAS income threshold, allowing you to get the maximum OAS pension.
A stock for your TFSA pension
You can start building a TFSA pension fund by allocating at least 20% of your contribution room to passive income stocks. Canadian Natural Resources (TSX: CNQ) is a stock to consider given its 24-year history of growing dividends at a compounded annual growth rate (CAGR) of 23%. The oil and gas producer includes the dividend amount while calculating its cost per barrel. It has the advantage of low-cost, low-maintenance oil sands reserves with a long life.
This advantage helped it grow dividends even during the 2014 oil crisis and the pandemic, which means it can give you income in every situation.
