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Kevin Greenard: Sharing your CPP

Since 2007, individuals receiving qualifying pension income were able to split it with their spouse in conjunction with filing their tax return.
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Kevin Greenard

Since 2007, individuals receiving qualifying pension income were able to split it with their spouse in conjunction with filing their tax return. However, Canada Pension Plan (CPP) benefits are not considered qualified pension income for purposes of income splitting on an income tax return.

While CPP payments are not eligible for pension income splitting, you can apply to share CPP with your spouse or common-law partner by writing to Service Canada. Many individuals often refer to sharing their CPP as “splitting CPP”, but the term “splitting CPP” applies to individuals who are separated or divorced and split their CPP credits. The term CPP sharing sounds much friendlier. The main purpose behind CPP sharing is tax savings. Income splitting between spouses and common-law partners receiving eligible pension income and/or CPP retirement benefits can result to significant tax savings during retirement.

There are a few criteria that must be met in order to qualify:

1) You must be living with your legal spouse or common-law partner;

2) You and your spouse or common-law partner both must be collecting CPP, or in the process of applying for it (unless one of you never contributed to CPP); and

3) Both you and your legal spouse or common-law partner must be at least age 60.

How it works

Spouse and common-law partners in continuing marriage or common-law relationships may opt to share their Canada Pension Plan (CPP) payments as a form of income splitting. This arrangement called “assignment” redistributes each spouse’s CPP income (from source). While maintaining the overall CPP amount received, the spouse in the higher income tax bracket receives less CPP, and the spouse in the lower income tax bracket receives more CPP resulting in tax savings.

If only one spouse or common-law partner contributed to CPP, then their one pension can be shared. However, if both spouses or common-law partners contributed to CPP, they may receive a share of both pensions. The amount of CPP retirement benefits that can be assigned depends on the length of time the spouses have lived together as well as the joint contributory period. The portion earned while living together is shared between the spouses.

Illustration

Bill has contributed to CPP for 30 years while being married to Margaret for 24 years. Margaret has contributed to CPP for 25 years. Bill may assign 80 per cent (24 years / 30 years) of his CPP retirement benefits, while Jane can assign 96 per cent (24 years / 25 years) of hers, whereby the combined amounts are divided evenly and paid to each spouse in addition to the unassigned amounts.

Say that Bill’s CPP retirement pension is $1,000 and Margaret’s is $500. Let’s say they decide to income split. Bill may assign up to 50 per cent of the benefits earned while they were living together. For him, that equates to $400 ($1,000 x 80 per cent x 50 per cent). Margaret then also has to assign 50 per cent of her CPP benefits earned while they were living together, which equates to $240 ($500 x 96 per cent x 50 per cent). The end result is Bill ends up with CPP benefits of $840 ($1,000 - $400 assigned to Margaret + $240 assigned from Margaret), and Margaret ends up with CPP benefits of $660 ($500 - $240 assigned to Bill + $400 assigned from Bill).

As you can see above, they do not end up with evenly split benefits because of the differing joint contributory period and total contributory period. If Bill and Margaret had been married for 30 years and both contributed to the plan for 30 years, then their CPP would result in an even split, as follows. Bill could assign $500 ($1,000 x 100 per cent x 50 per cent). Margaret could assign $250 ($500 x 100 per cent x 50 per cent). Bill would end up with CPP benefits of $750 ($1,000 - $500 assigned to Margaret + $250 assigned from Margaret). Margaret would end up with CPP benefits of $750 ($500 - $250 assigned to Bill + $500 assigned from Bill).

Revisiting the first illustration where Bill receives $840 per month and Margaret receives $660 per month. On a monthly basis, this may not seem all that significant of a difference. But let’s annualize this amount and see what the before and after T4A(P) slips would look like.

Before income splitting, Bill and Margaret would have had T4A(P) slips with $12,000 and $6,000 in taxable income, respectively ($1,000 x 12 for Bill and $500 x 12 for Margaret). After income splitting the T4A(P) slips would be $10,080 for Bill ($840 x 12) and $7,920 for Margaret ($660 x 12). Bill’s annual income is reduced by $1,920 ($12,000 - $10,080) and Margaret’s income is increased by this same amount ($1,920 = $7,920 - $6,000). Most importantly, the overall tax for the household may be lower.

For illustration purposes, say Bill’s marginal income tax bracket was 40 per cent, and Margaret’s was 25 per cent. By shifting $1,920 of income onto Margaret, Bill pays $768 less in taxes on his CPP ($1,920 x 40 per cent). Margaret then has to pay $480 in taxes on the assigned portion of her CPP ($1,920 x 25 per cent). In retirement, it’s often not about how much you make but how much you spend. The net impact is $288 less in taxes paid each year to Canada Revenue Agency by completing a simple request to share CPP.

Important reminders

Remember, you must apply to share CPP. Application forms are available online, along with some additional information regarding pension sharing. The process is simpler if you are both collecting CPP. If you are applying for CPP benefits at the same time, you will need to provide a pension sharing application along with some additional documents, such as a retirement CPP application, social insurance number, marriage certificate or proof of your common-law relationship. If you are both already receiving retirement CPP, then only your original marriage certificate or proof of your common-law relationship is needed with the pension sharing application.

There are two significant administrative differences between CPP sharing and the pension income splitting rules. With CPP sharing, the actual “cash-flows” will equalize after the application is processed. This is different than pension income splitting that is done when filing your annual income tax return by completing form T1032 – Joint Election to Split Pension Income, where there is no change in cash-flows during the year. Instead, it is a paper adjustment at year-end for tax purposes that changes each taxpayer’s taxable income and their respective resulting income tax liability upon filing their income tax return.

The other significant difference is that the CPP sharing applications only need to be done once. Other types of eligible pension splitting will require you to sign and file form T1032 on an annual basis. Saving taxes is often an accumulation of many small decisions and steps. CPP sharing is one small step that can be done today, and it all adds up with other tax-saving actions. Speak to your professional tax advisor about your particular facts and circumstances when evaluating, and before implementing, any tax planning strategies.

Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250.389.2138, email greenard.group@scotiawealth.com, or visit greenardgroup.com.