Clearing the air on pension splitting

"Spouses or common-law partners who are together, who are both at least 60 years old, and who are both receiving the CPP retirement pension, can share their CPP retirement benefits. This is called pension sharing, and may result in tax savings. If only one of you is a CPP contributor, you share that one pension. The overall benefits paid do not increase or decrease with pension sharing."
Querying CRA about this seeming discrepancy yielded nothing as the agency refused to answer any questions relating to CPP because it is administered by Service Canada. But a little digging illuminated the nearly invisible line between pension splitting and pension sharing.

The key to the confusion is found in the following Service Canada note: "To share your CPP retirement pension, you must apply."

Aha, now I get it!

After application and approval, CPP is physically split between spouses or common-law partners. Both receive a monthly cheque and both receive a TFA (CPP) slip. This has been allowed since 1987.

On the other hand, splitting eligible pension benefits while you are completing your tax return has only been in effect since 2007. Eligible income includes any pension that qualifies for the $2,000 Pension Income Tax Credit. (That credit, by the way, is multiplied by 15 per cent to reduce federal tax payable by $300 annually and a similar amount provincially.)

Generally speaking, most pension income that is paid regularly can be split for those over 65. Typically, lump sum payments are not eligible for splitting.

But before you jump in, check the CRA’s site for a broader explanation of pension splitting. Note that some foreign pensions can be split but not, for example, income from a U.S. Individual Retirement Account.

Because 2011 is behind us, applying for CPP pension sharing now won’t be reflected in your tax return. However, Cleo Hamel, a senior tax analyst with H&R Block, believes there is still time to split CPP for at least half of 2012 if the application is made soon. Go to www.hrsdc.gc.ca and search for "application for sharing of retirement pensions."

There are a number of seniors and other retired folk out there who are more than a little confused about what is and isn’t allowed in the area of pension splitting
On the surface, splitting pensions with lower income spouses seems eminently fair. A stay-at-home spouse, usually the woman, who cares for children and the household, is just as much a contributor to the family and society as the income earner. But those of us old enough to recall the bra-burning rallies and sit-ins of the 1960s and ’70s know that our mothers were, essentially, non-persons when it came to fair treatment in regards to pensions and taxes.
Despite protests back then, not everything has changed. Had my recently deceased mother outlived my father, for example, she would have received only a small Canada Pension Plan survivor benefit and just 50 per cent of his military pension but none of his disability payments.

His service-related disability had an impact on his ability to work when he retired from the Canadian Armed Forces, which, in turn, affected her. And because they hopped frequently from base to base during those hyper-vigilant Cold War years, she could not work and contribute to the Canada Pension Plan in order to ensure a retirement income.

There are still many inequities, particularly in the treatment of lower income spouses, regarding pension survivor benefits and also pension splitting. However, some progress has been made.

And this is where a herd of readers stampeded to their computers to comment on my last column, which mentioned splitting CPP as good strategy to lower taxable income for the higher-earning spouse.

Many quoted the following information contained on the Canada Revenue Agency website:

"The following amounts received by the pensioner are not eligible for pension income splitting: Old Age Security payments; Canada Pension Plan, Quebec Pension Plan; and amounts received under a retirement compensation arrangement."

That seems abundantly clear. Furthermore, a number of TurboTax users cited its table listing eligible and ineligible pensions for splitting. CPP and QPP fall into the not eligible category. UFile offers the same information.

But wait a minute, surf over to Service Canada’s website and you’ll find this:

Alison Griffiths can be reached at www.alisongriffiths.ca or griffiths.alison@gmail.com.




http://thechronicleherald.ca/business/80169-clearing-air-pension-splitting