Me and My Money

Pension splitting

Posted April 17, 2012
Originally Published April 2, 2012

There are a number of seniors and other retired folk out there who are more than a little confused about what is and isn’t allowed in the area of pension splitting.

On the surface, splitting pensions with lower income spouses seems eminently fair.   A stay-at-home spouse, usually the woman, who cares for children and household, is just as much a contributor to the family and society as the income earner.  But those of us old enough to recall the bra-burning rallies and sit-ins of the 1960s and 70s know that our mothers were, essentially, non persons when it came to fair treatment in regards to pensions and tax. 

Despite protests back then not everything has changed.  Had my recently deceased mother outlived my father, for example, she would have received only a small Canada Pension Plan survivor benefit and just 50 percent of his military pension but none of his disability payments.  His service related disability had an impact on his ability to work when he retired from the Canadian Armed Forces, which in turn affected her.  And because we hopped frequently from base to base during those hyper-vigilant Cold War years, she could not work and contribute to the Canada Pension Plan in order to ensure a retirement income.

There are still many inequities, particularly in the treatment of lower income spouses, regarding pension survivor benefits and also pension splitting, however some progress has been made.   And this is where a herd of readers stampeded to their computers to comment on my last column, which mentioned splitting CPP as good strategy to lower taxable income for the higher earning spouse.

Many quoted the Canada Revenue Agency’s information on the topic, http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/qlfy-eng.html,  “The following amounts received by the pensioner are not eligible for pension income splitting:

• Old Age Security payments;
• Canada Pension Plan, Quebec Pension Plan; and
• Amounts received under a retirement compensation arrangement.”

That seems abundantly clear.  Furthermore, a number of TurboTax users cited its table listing eligible and ineligible pensions for splitting.  CPP and QPP (Quebec Pension Plan) fall into the not eligible category.  UFile offers the same information.

But wait a minute, surf over to Service Canada’s site, http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/cppretirement/sharing.shtml, and you’ll find this, “Spouses or common-law partners who are together, who are both at least 60 years old, and who are both receiving the CPP retirement pension can share their CPP retirement benefits. This is called pension sharing, and may result in tax savings. If only one of you is a CPP contributor, you share that one pension. The overall benefits paid do not increase or decrease with pension sharing.”

Querying CRA about this seeming discrepancy yielded nothing as the agency refused to answer any questions relating to CPP because it is administered by Service Canada.  But a little digging illuminated the nearly invisible line between pension splitting and pension sharing. 

The key to the confusion is found in the following Service Canada note: “To share your CPP retirement pension, you must apply.”

Aha, now I get it!  After application and approval, CPP is physically split between spouses or common-law partners.  Both receive a monthly cheque and both receive a TFA (CPP) slip.  This has been allowed since 1987.

On the other hand, splitting eligible pension benefits while you are completing your tax return has only been in effect since 2007.  Eligible income includes any pension that qualifies for the $2,000 Pension Income Tax Credit.  (That credit, by the way, is multiplied by 15 per cent to reduce federal tax payable by $300 annually and a similar amount provincially.)

If your head isn’t hurting yet, pay attention to tax expert Evelyn Jacks’ tip in her book, Essential Tax Facts, (2012 edition.)  “To maximize the benefit of this credit, it is extremely important and valuable to split at least $2,000 to a spouse’s tax return so that this benefit could be doubled for the family, each and every year.”  This means that both spouses should have at least $2,000 of pension income to qualify for the credit.

Generally speaking, most pension income that is paid regularly can be split for those over 65.  Typically, lump sum payments are not eligible for splitting.  However, before you jump in, check the CRA’s site http://www.cra.gc.ca/pensionsplitting for a broader explanation.  Note that some foreign pensions can be split but not, for example, income from a US Individual Retirement Account. 

Because 2011 is behind us applying for CPP pension sharing now won’t be reflected in your tax return.  However, Cleo Hamel, senior tax analyst with H&R Block believes that there is still time to split CPP for at least half of 2012 if the application is made soon.  Go to http://www.hrsdc.gc.ca/cgi-bin/search/eforms/index.cgi?app=prfl&frm=isp1002&ln=eng or search for “Application for sharing of retirement pensions” on the Human Resources and Skills Development Canada website, http://www.hrsdc.gc.ca.

But before you complete it make sure that beefing up the income of your spouse won’t affect that person’s government benefits including the age amount deduction of $6,537 which starts being reduced when income reaches $32,961.

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