What is CPP benefits sharing?
The Canada Pension Plan (CPP) allows couples (married or common law) to apply to share their pensions equally. If one spouse’s benefits and tax bracket are higher than the other’s, dividing the total benefits between the two partners can result in overall tax savings for the couple, which is the point of this strategy.
(Note: CPP retirement benefits can be shared, but not the new Post-Retirement benefit)
Who can share CPP benefits?
You can apply to share your CPP benefits if you are receiving, or have applied for, benefits and both spouses are at least 60 years old. You can apply if your spouse did not contribute to the CPP or Quebec plan and therefore receives no benefits of their own, or if your spouse did contribute and does or will receive benefits. The result of benefit sharing is that you will each receive half of the total benefit based on contributions made while you were living together, rather than one receiving a larger benefit and the other receiving a smaller one. This equalization of benefits can result in tax savings because one spouse may be in a lower income tax bracket. (Income earned before the partners began living together is not part of the combined/shared pension calculation and benefits based on that income continue to be paid only to the spouse who earned them.)
CPP benefit sharing makes sense when one spouse’s benefit entitlement and taxable income are significantly greater than the other’s. Note that benefit sharing does not increase the amount of benefits you receive, it simply divides the benefits between the two individuals, who then declare these portions separately on their income tax returns. In effect, part of the benefit income is transferred to the spouse who is paying less tax.
CPP sharing ends with the death of either spouse or with separation or divorce. You can also apply to end the arrangement if your financial situation changes. Because there are certain specific circumstances when CPP sharing may not be to your advantage even if your benefit levels are different, make sure you discuss your application with your accountant or tax planning expert.
What is CPP credit splitting?
Although CPP pension benefits sharing is sometimes called splitting, they are not the same. Credit splitting is the division of CPP benefits after marital breakdown, based on the combined contributions of the two spouses during the relationship.
How credit splitting works
If you and your spouse part ways, CPP benefits can be split. Either spouse can apply for this division. Credit splitting makes the most difference if one partner has worked much less (while raising children, for example) than the other, and therefore has contributed less to the CPP, or for a shorter time, than the other. In a situation where one spouse has made the maximum CPP contributions through employment or self-employment, and the other spouse has made virtually no contributions, credit splitting could result in the non-contributing partner receiving about $250 per month in CPP benefits and the contributing spouse receiving that much less (amounts are approximate, so talk with your financial advisor about your particular situation).
The division of CPP benefits under credit splitting works like this: starting in the year the couple began living together, each spouse’s contributions for the year are calculated. The benefits based on that amount are then split so that each spouse receives half. The separated spouses can each determine individually when they want to apply for CPP, with their entitlement now based on half of the two spouses’ combined contributions.
Some complications can arise if a separated couple applies for both credit splitting and the child-rearing “drop out” (exclusion from contribution calculations of low-earning years spent raising children). The combination of these two provisions can lead to lost benefits, so consult with a financial planner or accountant well-versed in the intricacies of CPP. Sometimes it’s better not to split credits because the loss to one party is more than the gain of the other. But other provisions of the separation or divorce agreement may come into play to balance that, so all financial aspects of the relationship must be considered.
The timing of the application for credit splitting also matters, especially if the two spouses are of different ages and one is already collecting benefits and the other is not. Disability benefits also affect splitting. In these complex cases, it really is essential to discuss the permutations with your accountant and likely your divorce lawyer.
