Sharing your CPP can be beneficial

Beginning in the 2007 taxation year, pensioners were able to split qualifying pension income in conjunction with filing your tax return.  Form T1032 is required to be signed by both married or common-law partners who are together (not separated or divorced), but does not cover your retirement Canada Pension Plan benefits.  The ability to share CPP is not new and the process is different than pension splitting.

We were recently speaking with a representative at Service Canada regarding splitting CPP for a local couple.  The representative corrected us in letting us know that the term “splitting CPP” is used when couples are getting divorced and that the proper term is “sharing CPP,” which sounds a little friendlier than splitting.

In order to share your retirement CPP benefits, both of you have to be at least 60 years of age and receiving CPP.  You can make an application to share the portion of your pension benefits earned during your time together. The reason we like this idea is that it may result in tax savings for the household.  This program applies even if only one of you contributed to CPP.  In this case, the one CPP would be shared.  The ability to share your benefits does not increase or decrease the combined amount.

We will use an illustration to explain how the pension sharing works.  Pension sharing adjusts the amount of the monthly CPP each spouse or common-law partner receives.

Romeo and Juliet have been married since 1966 and are both receiving CPP.   Romeo’s monthly CPP benefit is $724, while Juliet’s is $212.  The combined benefit payments are $936, which equals their total “shareable” pension. With CPP sharing, they would each receive half of $936, or $468.  Romeo’s monthly CPP benefit has declined from $724 to $468.  Juliet’s monthly CPP benefit has increased from $212 to $468.

On a monthly basis this may not seem all that significant.  But let’s annualize this amount and see what the before and after T4A(P) slips would look like.

Before income splitting Romeo and Juliet would have had T4A(P) slips with $8,688 and $2,544 in taxable income, respectively.  After income splitting the T4A(P) slips would be $5,616 for both Romeo and Juliet.  Romeo’s annual income is reduced by $3,072 and Juliet’s increases by this same amount.  Most importantly, the overall tax for the household is lower.

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 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 with CPP sharing and the pension splitting rules.  With CPP sharing the actual “cash-flows” will equalize after the application is processed.  This is different than pension splitting that is done through form T1032 where there is no change in cash-flows (paper adjustment at year end for tax purposes).

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 the T1032 form on an annual basis.

Once the forms are completed for the CPP sharing arrangement it only ends if you and your spouse/common law partner separate or divorce, or when one of you dies.   CPP sharing may also be cancelled if both of you request it.  This may be one of the easiest ways to reduce the amount of tax you pay.