Case study: CPP credit split
One of the services that my business offers is to analyze the impact that a CPP credit split would have on a couple’s CPP retirement pensions, in advance of either party applying for a credit split.
The reason for this service is that approximately half of the credit splits that are done result in a net loss of CPP benefits to the couple, and if the couple know in advance that they will lose benefits, they can decide not to apply.
In most cases, the reason for this net loss of benefits is overlap of the credit-split period with the period covered by the child-rearing dropout provision.
Related article: Child Rearing Drop Out
Of the cases that I have reviewed, the highest net loss of benefits to the couple as a result of a credit split has been almost $200 per month, with the average loss being approximately $100 per month. The usual pattern is that the male spouse loses approximately $150 to $200 per month, while the female spouse only gains approximately $50 to $100 per month.
However, in a couple of cases that I reviewed, a credit split would even have caused a loss of benefits to both spouses, and this article is about one of those cases.
Rick and Alice’s situation (not their real names)
Rick and Alice were married and started living together on October 15, 1994, and they separated on November 15, 2014. They had two children, born in June 1999 and August 2004. Both spouses worked full-time during the first years of their marriage. When their first child was born, Alice started working part-time, and she later stopped working altogether and became a stay-at-home mom.
At the time they contacted me, they were negotiating a separation agreement and wanted to know what to do about the CPP credit-splitting provision.
Impact of a credit split on their pensionable earnings record
Based on the dates they gave me, if a CPP credit split were done, it would include the whole period of 1994 through 2013 (beginning with January of the year that they started living together and ending with December of the year prior to their separation).
The following table shows Rick and Alice’s CPP pensionable earnings before and after the potential credit split.
CPP pensionable earnings
Impact of a credit split on their retirement pension calculations
Both Rick and Alice plan to continue working until age 65, at which time they plan to apply for their CPP retirement pensions.
Based on my calculations, a CPP credit split would cause them both to lose money. A credit split would decrease Rick’s CPP by $142.45 per month, and it would decrease Alice’s CPP by $35.37 per month.
My obvious recommendation was that they agree not to apply for a credit split.
What causes the decrease to both of their retirement pensions?
The cause of the decrease to Rick’s CPP is fairly obvious. His earnings were higher than Alice’s during 15 of the 20 years that they were together, so a credit split would reduce his net pensionable earnings and would thus reduce his CPP retirement pension at age 65.
The cause of the decrease to Alice’s CPP is less obvious. She will lose some earnings to Rick for the first five years of their marriage when her earnings were higher than Rick’s, but she will gain earnings for the other 15 years, especially for the six years where she had zero earnings. Why then would her CPP retirement pension decrease as a result of a credit split?
The answer is the CPP child-rearing dropout provision (CRDO or CRP.)
How does the CRDO cause Alice’s retirement pension to decrease?
Alice can use the CRDO to drop out the entire period of time from July 1999 through August 2011, when at least one of the children was under age 7, if her earnings during those years were less than her lifetime average earnings level. With or without a credit split, her earnings are less than average for most of those years and she will drop out most of those 12 years.
That means that the only real impact of a credit split to her CPP retirement pension calculation is the loss of earnings during the first five years of the marriage, and this therefore would result in a decrease in her CPP at age 65.
While it’s unusual that a CPP credit split would reduce both spouses’ CPP benefits like this case did, it’s common that it creates a net loss of CPP benefits, especially if it overlaps with a period of CRDO eligibility.
If you are in this situation and want to know what the impact of a CPP credit split would be on you and your spouse, check out my CPP credit-splitting services at: CPP credit splitting