A bit of a quickie piece on pension “splitting” and “sharing.” I am assuming lots of folks are aware that pension income can be split by couples for tax purposes in Canada, but I’m wondering if people fully understand the concept of pension “sharing”. I will have to admit that I only found out about pension sharing years ago completely by mistake. Let’s begin by reviewing “pension splitting”.
Pension Income Splitting
Pension Income Splitting is a simple tax tactic that allows the transfer of eligible pension income to a spouse or common-law partner for tax purposes. No actual cash needs to be handed over. The transfer is only done on paper when you file your taxes. The general guiding principle is that the person splitting their income needs to be 65 years of age or older, as does the recipient – except in certain situations.
According to the Government of Canada website, any individual can split off up to 50% of their pension income to a spouse or common law partner for tax purposes. As way of a brief example, if one person has pension income of $75,000 and their spouse has income of $25,000 the higher income earner can split up to half of their pension amount (i.e. $37,500) and have their spouse claim it. In practice, the couple would split $25,000 so that they both ended up with taxable income of $50,000. No need to split the entire 50%. The spouse receiving the money does not have to have a pension of their own for this to happen.
For splitting purposes, the following sources of income are the most commonly identified as available for splitting:
- A registered workplace pension plan, whether or not it is a defined benefit pension or defined contribution pension.
- Funds drawn from a RRIF
- Some types of Annuity income
You will notice that I said, “most commonly identified”, and “some types of annuity income” can be split. For some couples with complex sources of retirement income it will not be as simple as I am portraying here. I am not attempting to explain to you in detail the various machinations or how more sophisticated income sources impact income splitting. There are much better sources than me for that information. I am not simply attempting to provide an introductory overview of both concepts.
What I would suggest though, is that it is a really good idea to have a professional prepare your taxes for you, even in retirement. They have a deep understanding of all these matters, and usually have excellent tax preparation software to do all the heavy lifting like pension income splitting.
To find more information about income splitting you can check out the Government of Canada main “Pension Splitting” and related topics page – (all generally confusing as hell really) – or do a Google search to find things explained in layman’s terms. These TurboTax and RBC articles are typical of the information you will be able to track down.
The other important thing to know is that some “pension” income does not qualify for splitting. CPP, OAS, QPP, etc. income cannot be split.
So, you’re thinking, “I have already heard about this and generally understood all of it, so what is your point?”
The point is, there is another way to “share” some of the income that does not fall under the “income splitting” guidelines. And it can potentially reduce a couple’s overall tax load.
Pension Income Sharing
As you have just read, you cannot split your CPP income for tax purposes. BUT, you can share it with your spouse or common-law partner. The usual scenario is a situation where one individual is receiving a much higher CPP payout than their spouse and decides to shift part of their CPP earnings to their partner.
Although I find the government of Canada website confusing when reading most of the tax information provided… (I think they are written primarily for tax professionals to refer to) … the page related to CPP sharing is relatively informative and easy to read.
If you want to do this, you do have to apply in writing, but it is not a terribly onerous task. If both individuals in a couple receive CPP payments, sharing can balance out payments so that both are receiving relatively equal amounts. Or, if only one person is receiving CPP payments they can share the funds with a spouse who is not eligible to receive CPP payments.
Calculating the amount that can be shared, from the Government of Canada site:
“The portion of your pension that can be shared is based on the number of months you and your spouse or common-law partner lived together during your joint contributory period. This period is the time when either one of you could have contributed to the CPP and/or QPP.”
The Government of Canada site also provides additional details and scenarios, including what happens to CPP sharing upon death, marriage break up, a decision to end sharing, etc. It is well worth reading.
Pension splitting and sharing, both excellent tools for retirees to reduce income tax payable.
