Many spouses and common law partners can opt in sharing CPP benefits with one another in order to realize tax savings. In order to do so, you must:
- Be receiving the pension or be eligible to receive it
- Be living with your spouse or common-law partner
- Be at least 60 years of age or older
- Both receiving CPP unless only one is a contributor
Sharing the CPP pension can result in reduction of your total income taxes as you’re shifting some of the income from the person in the higher tax bracket to the person with the lower tax bracket. With pension sharing, each person would receive a portion of the other person’s retirement pension. This portion is based on the time that the couple have lived together, in relation to their contributory period.
- Pension splitting will consists of two parts:
- Assignable Pension
- The assignable part should be split equally with your spouse.
- Both spouses’s pension has to be assigned, not just the pension of the one with the higher income.
- Unassignable Pension
- Assignable Pension
Example: Sharing CPP Benefits
Jorge and Natalie have been married for 20 years. They have both been working for 25 years and have the same number of years of contribution to the CPP. Jorge is entitled to a CPP Pension of $700 per month while Natalie is entitled to $350 per month. They are looking at sharing CPP benefits.
They can assign 80% of their pensions. (20 years married or cohabitation divided by 25 years of contribution). Their new pensions would be calculated as:
Jorge’s monthly CPP pension will consist of two parts
- Assignable Portion
- ($700 * 80% = $560) = $560 is the amount that can be assigned.
- Unassignable Portion
- ($700 – $560 = $140) = $140 is the amount that cannot be assigned.
Natalie’s monthly CPP pension will consist of two parts
- Assignable Portion
- ($350 * 0.80 = $280) = $280 is the amount that can be assigned
- Unassignable Portion
- ($350 – $280 = $70) = $70 is the amount that cannot be assigned
The total assignable CPP is $560 + $280 = $840. That amount would be split equally with half being paid to the spouse. The assigned portion would be $840 divided by 2 = $420. ($840 / 2 = $420)
New Pension Amount – Jorge & Natalie
Jorge’s new monthly pension after assignment is $420+$140= $560.(Jorge’s assignable portion + non assignable portion)
Natalie’s new monthly pension after assignment is $420 + $70 = $490. (Natalie’s assignable portion + non assignable portion)
As you can see, through sharing CPP benefits, you have effectively transferred income from a higher tax bracket (Jorge) to a lower tax bracket (Natalie). This pension splitting will free up cash flow and allow you to spend the funds on things that matter more such as family.
CPP Credit Splitting
The subject of credit splitting usually comes up when couples are going through a separation or divorce. The CPP contributions you and your spouse or common-law partner made during the time you lived together are known as CPP pension credits. When a relationship ends, the credits can be split equally between the couples. This is called credit splitting.
- Credits can be split even if one spouse or common-law partner did not pay into the CPP.
- Usually credits of one spouse is increased while the other is decreased.
- CPP credits are equalized for the period of cohabitation
Credit splitting is mandatory upon divorce in most provinces even with a written separation agreement. The provinces of British Columbia, Saskatchewan and Quebec allow former spouses to opt out.
The request for credit splitting could be made by either spouse or their lawyers. In regards to time limits, for common law relationship, an application should be filed within 4 years of living apart. There is no time limit for spouses.
For more information regarding the sharing CPP benefits or credit splitting, refer to Government of Canada’s official website.
