What a spousal RRSP still does now that pensions can be split

When pension income splitting arrived, many couples wondered whether they still needed the spousal RRSPs they had been building for years. If eligible pension income can simply be shared on the tax return, why go to the trouble of putting savings in the lower-earning partner’s name?

For some couples the answer really is that they no longer do. For others, a spousal RRSP still does things that splitting cannot: it works before 65, it can move more than half of a couple’s registered savings, and it can even keep working after the contributor has passed 71. The catch is a timing rule that trips people up at exactly the moment they need the money.

Why it looked redundant

Pension income splitting lets a couple allocate up to 50% of one spouse’s eligible pension income to the other, on form T1032, every year. The Canada Revenue Agency lists RRIF payments, including life income fund payments, among the eligible income once the transferring spouse is 65 or older. For a retired couple both over 65, drawing RRIF income, that covers much of what a spousal RRSP was designed to do: shift taxable retirement income towards the spouse with the lower rate.

But splitting has limits written into it, and each limit is a place where a spousal RRSP can still matter.

How a spousal RRSP works

A spousal RRSP is an RRSP held by one spouse, the annuitant, to which the other spouse contributes. The contributor uses their own RRSP deduction room and claims the deduction. The money then belongs to the annuitant’s plan, and when it is withdrawn it is normally taxed as the annuitant’s income.

The CRA notes two details that matter later in life. A contributor can keep contributing to a spouse’s RRSP until the end of the year the spouse turns 71, even if the contributor is older. And money cannot be transferred from your own RRSP into a spousal plan; spousal contributions use deduction room, not existing savings.

The three-calendar-year rule

To stop couples contributing one year and withdrawing in the other spouse’s name the next, the tax rules attribute some withdrawals back to the contributor. The CRA’s guidance is that if you want to avoid including any amount in your income when your spouse withdraws, you should not have contributed to any of your spouse’s RRSPs in the year of the withdrawal or in either of the two preceding years.

The amount attributed is the lesser of what the spouse withdrew and what the contributor put into spousal plans in that three-year period. For a spousal RRIF, only amounts above the year’s minimum are attributed; the minimum itself is taxed to the annuitant. Form T2205 is used to work out how much each spouse reports.

An illustrative withdrawal timeline

The pattern is the point. Planning a spousal RRSP for an early retirement means planning the last contribution, so that the years in which the money will be needed fall outside the window.

What it does before 65

This is the clearest remaining use. Under 65, the only income the CRA treats as eligible for splitting is the taxable part of life annuity payments from a pension plan, plus a few amounts received because of a spouse’s death. RRIF payments do not qualify, and lump-sum RRSP withdrawals never do.

A couple who stop working at 60 and live on registered savings until CPP and OAS begin therefore cannot split that income. If the savings sit in one spouse’s RRSP, the withdrawals are taxed to that spouse alone. If part of them sits in a spousal RRSP, past the three-year window, withdrawals from it are taxed to the other spouse. Those early years are often when a workplace pension’s bridge benefit or an early CPP start also complicates the picture.

Beyond the 50% limit, and after 71

Splitting moves up to half of eligible pension income. When one spouse holds nearly all of a couple’s registered savings, half may not be enough to even out their incomes. Money already in a spousal plan is the annuitant’s income from the start, before any splitting is considered.

The age rule offers one more use. A contributor who is past 71, still has RRSP deduction room, and has a spouse aged 71 or younger can contribute to the spouse’s RRSP and claim the deduction, which is no longer possible for their own plan.

Spousal RRSPs become spousal RRIFs on the same timetable as any other RRSP; the reasons some people convert before 71 are in why some retirees open a RRIF before they have to.

What to check

The short version

Pension splitting did much of a spousal RRSP’s old job for couples over 65. It did not replace it entirely. Before 65, beyond the 50% limit, and for contributors past 71 with a younger spouse, a spousal RRSP still shifts retirement income in ways nothing else can, provided the last contribution was made at least three calendar years before the withdrawal.

SOURCES ON FILE

1. Canada Revenue Agency — Withdrawing from spousal or common-law partner RRSPs — attribution for contributions in the year or the two preceding years; RRIF amounts above the minimum.
2. Canada Revenue Agency — Spousal RRSPs when you turn 71 — contributions until the end of the year the spouse turns 71.
3. Canada Revenue Agency — Pension income splitting — eligible income at 65 or older and under 65.
4. Canada Revenue Agency — Form T2205 — amounts from a spousal RRSP or RRIF to include in income.

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