Many Canadians approaching retirement wonder if they should share their CPP retirement pensions. While this may be advantageous for some, it’s not always the best choice for all.
First and foremost, in order to be eligible to share your CPP pensions, you must currently be married or in a common law relationship. Single individuals, as well as those who were previously married or in a common law relationship but are now separated or divorced, and not allowed to share their CPP pensions. Further, it is not possible to share CPP retirement pensions between siblings, parents and children, or any other family relationships – the only people who can share CPP are currently married spouses or common law partners.
The primary reason to share CPP pensions is to try and balance retirement incomes between spouses or common law partners. And the main reason to do that, of course, is to lower the overall household tax bill.
In this sense, CPP pension sharing is essentially a tax planning strategy, which provides an opportunity to shift a portion of retirement income from the higher income spouse to the lower income spouse. By shifting income away from the spouse with a higher marginal tax rate, and into the hands of the spouse with a lower marginal tax rate, a couple may be able to pay less taxes overall.
Note, however, that a CPP pension assignment does not increase or decrease the total household CPP retirement pension between the partners. That is, the same total amount of CPP retirement pension is received, but it is redistributed between the spouses, with the goal of lowering the overall tax payable within the household unit.
When CPP Sharing Makes Sense
In general, CPP sharing makes sense when the spouses or partners have significantly different incomes – different enough such that they are in different marginal tax rates. Further, the higher income spouse must also be the one receiving the higher CPP retirement pension. When this is the case, the net effect of sharing will be that a portion of the CPP pension of the higher income spouse will be taxed in the hands of the lower income spouse, thereby reducing the family’s overall tax bill.
Example: Jim and Jenny are married, and are both receiving CPP retirement pensions. Jim’s total retirement income is $30,000 per year, and Jenny’s is $60,000. Jim’s CPP retirement pension is $300 per month, and Jenny’s is $700 per month. Jim and Jenny will benefit from a CPP sharing arrangement, as the net effect will be to allow a portion of Jenny’s CPP retirement pension to be taxed to Jim at his lower marginal tax rate.
When CPP Sharing Doesn’t Make Sense
CPP sharing, even when possible, isn’t always advisable. In particular, CPP sharing generally does not make sense when the spouses or partners have similar incomes and are in the same marginal tax rate. Also, sharing does not make sense when the spouse with the overall higher income has a lower CPP retirement pension. In this case, sharing only serves to exacerbate the issue, and shift even more income to the higher income spouse.
Example: Bart and Betty are common law spouses, and are both receiving a CPP retirement pension. Bart has a generous pension from his previous employer, and has a total retirement income of $65,000 per year, while Betty’s total retirement income is only $40,000. However, Jenny’s CPP retirement pension is $550 per month, while Bart’s is only $400 per month. In this case, Bart and Betty should not share their CPP retirement pensions. The net effect of the sharing would be to have more of the total CPP benefit taxable to Bart, but since he’s already the higher income spouse, this would only serve to further decrease tax efficiency.
CPP Sharing – Rules to Remember
A few items to keep in mind, should you and your spouse or partner decide to share your CPP retirement pensions:
- If both spouses or partners have contributed to the CPP, and CPP sharing is desired, then both must also share their CPP pensions. Although it may be desirable for only the higher income spouse to share his CPP pension with the lower income spouse, this is not permitted. That is, the sharing cannot be uni-directional. If one spouse shares, the other spouse must also share.
- The only exception to the previous point is the situation where one spouse has never contributed to the CPP. In this case, the sharing of only one spouse’s CPP retirement pension is permitted, however both spouses must still be at least 60 years of age.
- The amount of CPP retirement pension that can be shared between the partners or spouses is not arbitrary. Rather, the amount is determined by a formula based on how long the spouses or partners have lived together, and how long each partner or spouse has contributed to the CPP.
CPP pension sharing can help couples reduce their overall household tax bill in some cases. If you’re wondering whether or not CPP sharing makes sense in your case, we can help you crunch the numbers and make an informed decision. If you would like to have a discussion with a Portfolio Manager or Certified Financial Planner, just contact us.