CPP/QPP pension sharing benefits

Couples receiving pension income have two possible options to adjust their taxable incomes and reduce their total taxes.

Pension income splitting

One option is pension income splitting where spouses can, jointly elect to report up to 50% of their spouse’s pension income in their tax returns to reduce the total income taxes they pay. However, these rules apply only to certain types of eligible pension income which does not include Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) retirement pension benefits.

Pension sharing

Fortunately, CPP and QPP retirement benefits are eligible for pension sharing. This option may also provide tax savings if one spouse is entitled to a higher amount and the spouses have different levels of taxable income. This can be beneficial where one spouse is in or close to entering a higher tax bracket than the other spouse.

Sharing retirement benefits

Once both spouses reach the age of 60 and are receiving or are eligible to receive CPP and/or QPP retirement benefits, they can apply to share their benefits. Although the total benefits paid to the couple remains the same, the amount payable to each spouse is adjusted to equalize the benefits each of them receives, which can help reduce their combined taxes payable.

A few important points to note:

• The portion of pension benefits that can be shared is based on the time the spouses resided together while either was eligible to make contributions.
  
• The amounts available to be shared may be affected if credits were split as a result of any previous marriage or common-law relationship.
  
• Possible adverse implications should be carefully considered, such as the OAS clawback and the potential impact on spousal and senior tax credits.
  
• Pension sharing continues until a cancellation request is approved, one spouse dies, the couple divorces or after a specified time following a relationship breakdown. The benefit(s) payable would then be adjusted to the amount(s) that would have been paid prior to pension sharing.

In the right circumstances, this strategy can reduce your overall taxes payable. Contact your financial advisor to discuss the advantages of sharing CPP or QPP pension benefits with your spouse.