In order to save on income tax, seniors may income split their pension income in two different ways. The first method is Canada Pension Plan (CPP) income splitting and the second method is the Tax Fairness Plan. Let us first look at some basic information about CPP income splitting and then the Tax Fairness Plan.

1. Canada Pension Plan (CPP) income splitting.

• Both spouses/common law partners must be at least sixty years old (60) to income split.
• If both spouses/common law couples are eligible to collect CPP, both pensions must be split.
• The split is the ratio of time the couple has been living together to the period of time during which contributions are made.
• Income Split Formula = Years Living Together/Contributory Period x CPP Pension divided by 2.

Example: CPP Income Splitting

Happy and Sad have been married for four of the eight years they have lived together. Happy has made CPP contributions for 40 years. This year, Happy received $1,000 of CPP income. Sad never worked outside the home.

How much will each receive after income splitting using the CPP income splitting formula?

Years Living Together (8 years)/ Contributory Period (40years) x CPP ($1,000) = ($200.00) divided by 2 = Happy and Sad will receive $100 each. The remaining portion of the $1000.00 is $800.00. Happy also receives the $800.00 ($1,000.00 minus $200.00 = $800.00).

Answer:	Happy gets $800.00 plus $100 which = $900.
	Sad is only entitled to $100.00

2. Tax Fairness Plan (income splitting)

• The Pensioner is someone in receipt of eligible pension income.
• Eligible pension income for people under age 65 (at the end of the year) is income from a life annuity from a registered pension plan (RPP). Special income splitting rules apply regarding income received as a consequence of the death of a spouse.
• Eligible pension income for people age 65 and over (at the end of the year) not only includes income from a life annuity from a registered pension plan (RPP) but also annuity payments from a matured RRSP, RRIF, LIF, LRIF, DPSP and the taxable portion of a non-registered annuity payment (prescribed or non prescribed).
• Income that does not qualify for pension income splitting as eligible pension income under the tax fairness plan includes CPP and Old Age Security (OAS) payments.

Example: Tax Fairness Plan (income splitting)

Mary (age 66) earns $80,000 in eligible pension income each year. Her husband, Bruce (age 65), does not have any eligible pension income. Mary elects on her T-1 to split her income with Bruce 50/50 and Bruce accepts.

What is the maximum amount of eligible pension income that Mary receives this year that she can transfer to Bruce’s tax return?

$80,000.00 x 50% = $40,000 to Bruce

Answer:	Mary pays tax on $40,000.00 of the $80,000.00 eligible pension income.
	Bruce pays tax on $40,000 of Mary’s $80,000 eligible pension income.

Questions

Below are four questions for you to answer regarding these two income splitting methods for seniors. You should be better prepared to answer income splitting questions on your LLQP exams after completing this quiz review. The correct answers to these four questions along with rationales and references, are found at the end of this e-newsletter. Good luck!

1. Rhonda (age 65) and her husband Herb (age 64) want to income split their CPP pension with each other. Rhonda is entitled to receive $960 monthly from CPP. Herb in entitled to receive $550 monthly from CPP. They have been married for 40 years and have made CPP contributions for the same amount of time. What is the monthly maximum amount each will receive after income splitting?

1. Rhonda $960 Herb $550
2. Rhonda $480 Herb $1,030
3. Rhonda $755 Herb $755
4. Rhonda and Herb cannot income split as both parties must be age 65 or older to income split CPP benefits.

2. Celine and Bernard are both 65 years old. Celine is entitled to receive $960 monthly in CPP benefits and Bernard in entitled to receive $350 monthly from CPP. After income splitting their CPP Pensions, Celine will be subject to a 42% tax rate and Bernard a 22% tax rate. After Celine and Bernard have income split their CPP, what is their annual dollar savings on income tax?

1. $61
2. $655
3. $732
4. $1,152

3. Anil (age 62) and Gurpreet (age 64) have been married for 30 years. Anil wants to split his eligible pension income with Gurpreet. Their monthly income sources are as follows:

	Anil	Gurpreet
RPP	$1,800	$1,200
RRSP	$2,200	$1,000
DPSP	$4,000	$0

How much eligible pension income could Anil transfer to Gurpreet under the tax fairness rules?

1. $0 — rules only kick in once Anil reaches age 65
2. $900
3. $1,500
4. $4,000

Pedro (age 66) and Wauneta age (65) have been living common law for 15 years. Wauneta wants to split her eligible pension income with Pedro. Pedro agrees to the transfer. Their monthly income sources are as follows:

	Pedro	Wauneta
CPP	$500.00	$960.00
OAS	$525.00	$525.00
RPP	$300.00	$4,200.00
RRSP	$0.00	$1,500.00

What is the maximum eligible pension income that Wauneta could transfer to Pedro for income tax purposes under the tax fairness plan?

1. $273.75
2. $750.00
3. $2,100.00
4. $2,850.00

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Answers

1. - c. Rhonda $755 Herb $755

Rationale: Both must be age 60 or over to income split CPP pension income. Both are over 60. Since both of them are receiving CPP benefits, both pensions are split.

Step one: Years living together (40 years) divided by the contributory period (40 years) multiplied by the CPP pension, which = the portion of the CPP that can be assigned (transferred) to their spouse/common law partner.

Step two: Add the two CPP pensions together ($960 + $550 = $1510.)

Step three: Divide the combined CPP pension into two ($1,510 / 2 = $755 each. 

Reference: LLQP Study Guide, Volume 2, Module 10 Assignment (sharing) of retirement pensions.

2. - c. $732

Rationale:

Step one: combine CPP pensions and divide by two ($960 + $350 = $1,310 / 2 = $655 CPP each).

Step two: Celine is transferring $305 CPP of her $960 to Bernard ($960 - $655 = $305)

Step three: $305 x (43% tax rate - 22% tax rate = 20% tax savings) = $61 in monthly tax savings

Step four: $61 x 12 months = $732 in annual tax savings

Reference: LLQP Study Guide, Volume 2, Module 10 Assignment (sharing) of retirement pensions.

3. - b. $900

Rationale: Anil is under age 65, so the only eligible pension income that he may transfer to Gurpreet is RPP income ($1,800 / 2 = $900 to Gurpreet).

Reference: LLQP Study Guide, Module 2, Volume 10, Pension Income Splitting

4. - d. $2,850 transferred to Pedro for tax purposes.

Rationale: RPP and RRSP annuity income qualifies as eligible pension income under the tax fairness plan for someone 65 or over. CPP and OAS do not qualify as eligible pension income under tax fairness rules.

Step one: $4,200 RPP + $1,500 RRSP = $5,700.

Step two: $5,700 x 50% = $2,850 from Wauneta to Pedro for tax purposes

Reference: LLQP Study Guide, Volume 2, Module 10, Pension Income splitting

We at Foran and Advocis want to wish you success on your LLQP exams!

Yours truly,