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Income splitting is a perennial hot topic among retirees, but one aspect of it is often neglected, according to some financial planners: the ability to share Canada Pension Plan payments.
In a country with a progressive tax system, where additional income is subject to a higher tax rate, splitting means attributing some of that money to a spouse or common-law partner who is taxed at a lower rate. Doing so can sizably reduce a couple’s overall tax bill.
Since Canada introduced income-splitting rules for certain kinds of pension income in 2007, retirees have been taking advantage of the tax perk with gusto. But the focus on shifting income from the higher to the lower earner on a couple’s tax return has somewhat diverted people’s attention away from the fact that CPP benefits can also be divided, according to David Field, a certified financial planner and founder of Papyrus Planning.
“CPP pension sharing is a very important thing to look into, especially if there’s a big difference in contributions,” Mr. Field said.
Many people likely aren’t aware of the possibility to allocate part of their CPP benefits to their better half, he added. A quick web search yields some hints why that may be.
Look up “income splitting,” and you’ll find a variety of reputable sources warning that CPP – along with Old Age Security benefits – is not eligible for it.
That information is correct. Generally, if you’re 65 or older you can allocate up to 50 per cent of certain types of pension income to your spouse on their tax return. That includes payments from a workplace pension plan, a registered retirement income fund (RRIF) or a life income fund (LIF), among several others.
But couples cannot similarly divide up their CPP payments.
Still, most online explanations of how pension income splitting works neglect to mention that Canadians can also share the CPP – by applying to Service Canada to do so.
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The point of spreading CPP payments more equally is the same, Mr. Field said. If one spouse has much higher benefits, sharing can help trim the couple’s overall taxes.
If both of you have been contributing to CPP or the Quebec Pension plan, sharing helps to distribute payments more equally. If only one of you contributed, you can share the one pension.
You must be living together to share the CPP, Mr. Field said. If both of you have been contributors, it’s not necessary to start receiving benefits at the same time. But to start sharing them, both of you must be receiving – or apply to start receiving – CPP income, he added.
Also, you can only split amounts that correspond to the years you’ve been together, he added.
Curiously, few of the software programs that help financial planners to plot their clients’ options in retirement ask for inputs such as how long two spouses have been together or have contributed to the CPP, information that is essential for estimating pension-sharing, Mr. Field said. That may be another reason why CPP splitting is often overlooked, he said.
Over all, the better-known, tax return-based pension income splitting offers more flexibility, Mr. Field said. For example, should the spouse in the lower tax bracket receive an inheritance and see their taxable income spike in a particular tax year after selling assets, such as a cottage, that can generate capital gains, a couple might simply avoid splitting their income on that particular tax return, he added.
While spouses can apply to cancel CPP sharing, the arrangement can’t be tweaked from year to year.
Also, the rise of dual-income households means that more couples receive similar levels of CPP benefits in retirement, reducing the need to share the pension, Mr. Field said.
Still, for couples who don’t have many other sources of income that would be eligible for income splitting, sharing the CPP can be well worth it, he said.
Editor’s note: This article has been updated to include an example of a financial event that might cause a lower-income spouse to see their income temporarily spike, such as the sale of a family cottage they inherited.
