Three examples where pension splitting makes sense

There are three tax planning strategies – Deduct, defer and divide.  Income splitting is a way of dividing income and pension splitting is a great strategy to help couples reduce taxes.  Sometimes rules can be confusing so I thought I would share a few examples of real life people who were able to take advantage of pension income splitting

One pension household

Rick is 66, self employed and still working.  His wife Susan has retired at age 60 with a $1200 per month pension plus $325 per month from Canada Pension Plan.

Although Susan can give up to $7200 to Rick under pension splitting, she should no because Susan is in a 25% marginal tax rate and Rick is in a 36% marginal tax rate.

Since Rick does not have a pension, Susan can give Rick $2000 of her pension so that he qualified for the $2000 Pension Income Tax Credit.  Alternatively, Rick can also convert some of his RRSPs to a RRIF or an annuity to generate $2000 per year of income which would also make him eligible for the Pension Income Tax Credit.

One couple with two pensions

Joanne and Steve are both retired teachers.  Steve has a bigger pension ($2800 per month) and continues to do some contract work on a part time basis.  When Steve adds up his income (Pension, CPP, and part time work), he is making about $65,000 per year and is in the 32% marginal tax bracket.  Joanne is making about $1900 per month from pension and $450 per month from CPP.  At $28,200 of income, Joanne is in the 25% marginal tax bracket.

Under the pension splitting rules, Joanne and Steve can give their spouse up to 50% of their pension for tax purposes.  It makes no sense for Joanne to move money from a lower tax rate to a higher tax rate.  It does, however, make sense for Steve to give some of his pension to Joanne.  If the next tax bracket is $42,707, then Steve can give Joanne $14,507 of his pension ($42,707 minus $28,200).  This moves money from a 32% tax bracket to a 25% bracket and saves them $1015 in taxes.  Steve is eligible to move up to $16,800 to Joanne but anything greater than $14,507 puts her into the 32% marginal tax rate.

Common law with no pensions

Zack is retiring at the age of 62 and never had a pension through work.  Instead, he contributed to a group RRSP and when he retires he figures he will need to generate about $2000 per month from a RRIF to supplement his CPP and some part time work he has lined up.  His wife Miranda did not work much and also has no pension.  She is currently collecting about $375 per month in CPP and does some freelance writing for about $500 per month.

Although Zack is in a higher tax bracket than Miranda, he cannot give any of his RRIF income to Miranda under pension splitting until the age of 65 because RRIF and annuity income does not qualify as eligible pension income until age 65.

One more case study

In case you need another example, CRA has a nice youtube video on Stu and Annabelle Johnson.

To get a full scoop on the administrative issues around pension income splitting, visit the CRA website.

Can you think of other circumstances where pension splitting makes sense?

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

7 Responses to Three examples where pension splitting makes sense

  1. Just turning 55 in May and starting to look at the best option for my retirement.
    I am receiving survivoy benifits from CPP, will this amount decrease or stop when I retire and start receive my CPP benefits?
    If it does reduce can you tell me be by how much it will decrease?
    Also is there a way to find out what I will receive in CPP benifits. Thanks.

    • Norma
      I agree with Jim’s reply, but the “combined benefit” calculation is considerably more complex than just being subject to a maximum.
      Did you try contacting Service Canada, and if so were you satisfied with the information that they gave you? My experience is that they are generally reluctant to provide much detail on combined benefit calculations. If you need any further assistance in this regard, let me know and I’ll see if I can help you with accurate calculations.

  2. When I click on the video, it comes up as a private video, unable to view??

    What if there is only 1 person getting CPP (spouse never contributed to CPP and does not have a pension plan), is CPP splitting recommended in that situation?

    We split my pension now but curious about splitting CPP when I apply.

    • Denis
      Splitting your CPP retirement pension(actually called “assignment”) is certainly possible, even though your spouse never contributed. The amount that is “split” is based on how many years you have lived together in relation to your contributory period.
      Whether it will be a tax advantage depends on your relative income tax brackets, as described by Jim above.

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