If you’re a Canadian nearing retirement or already enjoying your golden years, you’ve probably heard a thing or two about the Canada Pension Plan (CPP). One topic that might seem a bit confusing at first is CPP pension splitting. What is it? Why do it? Today, we’ll break it down in a way that’s easy to understand.

What is Pension Splitting?

Pension splitting is a financial strategy available to married or common-law couples in Canada. it’s commonly done with CPP, and it allows you to equalize your retirement pension with your spouse or common-law partner. The goal? To potentially reduce the overall tax burden by splitting the pension income, which can be beneficial if one partner is in a higher tax bracket than the other.

How Does CPP Pension Splitting Work?

Let’s start with the basics. When you and your spouse or common-law partner are both at least 60 years old and one or both of you are receiving CPP retirement benefits, you can apply to split your CPP pensions. The amount that can be split is based on the amount of time you’ve lived together during your contributory period to the CPP.

Here’s a simple example to illustrate:

• Meet Jane and Bob. They’ve been married for 30 years, and both are now 65. Jane receives $1,000 a month from CPP, and Bob receives $600 a month.
• Combined CPP Pension. Together, they receive $1,600 a month.
• Splitting the Pension. They can choose to share their CPP benefits, effectively splitting the $1,600, so each receives $800 a month.

This doesn’t mean the total amount of your combined CPP benefits will change. Instead, it’s about redistributing the amount each person receives to potentially lower your tax bill.

Why Consider Splitting Your Pension?

So, why should you consider this move for yourself? There are a few good reasons:

1. Tax Savings: If one spouse is in a lower tax bracket, transferring some of the CPP income to them can reduce the overall tax payable. For instance, if Bob is in a lower tax bracket than Jane, splitting Jane’s higher CPP income can result in significant tax savings for the couple.
2. Equalizing Retirement Income: It can help balance the retirement income between both spouses, ensuring a more equitable distribution of resources.
3. Flexibility and Control: CPP pension splitting provides an added layer of flexibility and control over your retirement finances. It’s a strategic tool that can be tailored to suit your specific financial situation.

Who is Eligible for Pension Splitting?

To be eligible for CPP pension splitting, you must meet the following criteria:

• You and your spouse or common-law partner must be living together.
• At least one of you must be receiving CPP retirement benefits.
• Both of you must be at least 60 years old.
• You need to have contributed to the CPP during your working years.

How to Apply for CPP Pension Splitting

Applying for CPP pension splitting is relatively straightforward. Here’s a step-by-step guide:

1. Get the Application Form: You’ll first need to download the “Application for Pension Sharing of Retirement Pension(s) Canada Pension Plan (ISP-1002)” form. This form is available on the Service Canada website.
2. Complete the Form: Both you and your spouse or common-law partner must provide information and sign the form. You’ll need to include details such as your Social Insurance Numbers (SIN), marriage or common-law relationship dates, and your CPP pension amounts.
3. Submit the Form: Once the form is completed and signed, you can mail it to Service Canada. It’s a good idea to keep a copy for your records.
4. Wait for Processing: Service Canada will process your application and notify you of their decision. If approved, your CPP benefits will be adjusted according to the splitting arrangement you’ve specified.

Things to Keep in Mind

While splitting your pension can be beneficial, there are a few important considerations to keep in mind:

• Impact on Other Benefits: Splitting your CPP pension may affect other income-tested benefits or credits, such as the Guaranteed Income Supplement (GIS) or Old Age Security (OAS) benefits. Make sure to evaluate how this change might impact your overall financial situation.
• Changes in Relationship Status: If you separate or divorce, the pension splitting arrangement will be terminated. It’s important to notify Service Canada if your relationship status changes.
• No Retroactive Splitting: CPP pension splitting cannot be applied retroactively. It will only affect payments from the date of application onward.
• Annual Review: Your CPP pension splitting arrangement will be reviewed annually, and adjustments will be made if necessary based on changes in your living arrangements or other factors.

Wrapping it Up

Retirement should be a time to enjoy the fruits of your labor and relax. CPP pension splitting is a valuable tool for Canadian couples looking to optimize their retirement income and potentially reduce their tax burden. By understanding how it works and considering your unique financial situation, you can make an informed decision that benefits both you and your spouse, potentially resulting in more after-tax income to enjoy your retirement.

Remember, it’s always a good idea to consult with a financial advisor or tax professional before making any major financial decisions, including CPP pension splitting. They can provide personalized advice and help you navigate the specifics of your situation!