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The kind of pension that qualifies, when it makes sense to defer and the tax consequences to watch out for
Q: I am 62 years old and I receive a pension from my work. At the same time, I am still working part time. My question is can I split my pension with my husband who is 64 years old? He is retired with no pension from his work.
I would appreciate if you can educate me regarding income splitting.
—Sally
A: Pension income splitting turns 10 this year, Sally, having been introduced for the 2007 tax year. I’ll explain how it works and give you some tips for minimizing your tax and maximizing your pension income sources.
To begin, eligible pension income from age 55 to 65 includes only defined benefit (DB) pension income or eligible foreign pensions that are taxable in Canada. There are exceptions for annuities, deferred profit sharing plans (DPSPs), registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), and a few other sources of income, but only if the income is because of the death of a spouse. The full list can be found here.
After age 65, the income eligible for splitting expands to include RRIF and annuity income, amongst other sources. The full list can be found here.
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In your case, Sally, it sounds like your pension income is a DB pension, which would qualify given your age of 62 to split up to 50% with your husband. The act of splitting the income requires nothing proactive – it’s a retroactive process on your tax return. You can allocate up to half your eligible pension income to your husband by completing Form T032 Joint Election to Split Pension Income when you file your tax returns.
You would generally only split your pension income if doing so resulted in a lower total tax payable or a larger refund for you and your husband. Given your situation, Sally, with you working and receiving the pension and your husband with no income, it’s likely that you are in a higher tax bracket than your husband. So, moving income from your tax return to his likely makes sense.
Each year, you and your husband can make the election to split some portion of your eligible pension income. You may elect a different amount each year. He may even have eligible pension income in the form of, say, RRIF withdrawals, in the future. So, a point may come where he splits some of his eligible pension income with you.
A couple points on tax and cash flow planning for you and for other readers, Sally. Sometimes, deferring the start date of a pension you don’t otherwise need to collect can make sense. If you leave a job after age 55, have the option to defer your pension and expect to continue working, for example, this may be worth considering. Pensions are generally adjusted higher if you take them later.
In your case, Sally, you are eligible to start your Canada Pension Plan (CPP) retirement pension currently and your Old Age Security (OAS) pension at age 65. Because you’re still working and under age 65, if you start your CPP, you will still have to contribute and your CPP pension benefits will be adjusted upwards accordingly.
But since you may not need your CPP now or your OAS at age 65 given you’re working, remember that both pensions can be deferred until age 70. Deferring your CPP and OAS pensions results in increases to these monthly pension benefits.
If you start your CPP before 65, your monthly benefit is reduced by 0.6% (7.2% per year). If you start it after 65, the benefit is increased by 0.7% per month (8.4% per year). Since CPP is also adjusted to account for increases in CPI inflation, deferring also results in an additional 2% or so per year for inflationary adjustments.
OAS deferred past age 65 increases at a rate of 0.6% per month or 7.2% per year. It too is adjusted for inflation.
If you don’t otherwise need your CPP and OAS pensions, Sally, you might consider deferring them, particularly if you expect to have a long life expectancy. Another reason to consider deferring your CPP or OAS is if you have investments you can use to bridge the gap until 70, particularly if you have a low risk tolerance.
Of note is that while CPP and OAS are not eligible pensions for the purposes of income splitting, your OAS pensions should be the same at age 65 assuming you have both lived in Canada for most or all of your lives. You need 40 years of residency after the age of 18 to qualify for the maximum OAS pension.
And while CPP pensions are not eligible for pension income splitting on your tax return, you can split your CPP in another way when you apply. CPP “pension sharing” can be accomplished by completing Form ISP1002 Application for Canada Pension Plan Pension Sharing of Retirement Pension(s). The pension entitlement for you and your husband will be adjusted so that you are splitting your pensions earned during your joint contributory period for the time period that you have lived together. This changes the amount of pension income you both receive each month, as well as how much CPP gets reported on both your tax returns as a result.
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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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Is retroactive income splitting allowed for 2017 and 2018 tax years? Can you go back two years and make the change? Thanks.
Gelek
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I RECEIVED A LUMP SUM PAYMENT IN 2019 FROM MY COMPANY PENSION Plan. Can I income split any part of that with my spouse
Thank you to the comments area which gives me ideas on how to help my ADHD teenager manage finances as I definitely worry about it! It would be nice to see this article re-written (or an optional link) in teenage friendly language that is more in bullet form or a shorter version. I would also welcome additional links/resources as I have not seen financial articles written for people with ADHD before. Thanks!
I realize when I split my pension income with my spouse, it drives up her income, but should it not drive my overall income down by the same amount?