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Spousal RRSPs still worthwhile despite new pension-splitting rules for couples

by Wayne Cheveldayoff, 2007-01-18

The spousal RRSP is still an excellent means for couples to split income and save on income tax despite the federal government’s new rules allowing pension splitting.

While the new rules have been embraced as a sizeable gift for pensioners, they in fact provide only limited tax relief, and mostly only for those 65 years of age and older.

Under the new rules, a pensioner can allocate up to 50 per cent of annual pension income to a spouse (or common-law partner) and have that taxed at presumably a lower marginal tax rate in the hands of the spouse. This would produce tax savings.

This splitting rule applies to employer-sponsored pension income, either from a defined-benefit or a defined-contribution plan.

It also applies to income from an RRSP annuity, a RRIF, a LIF (locked-in RRIF), or a deferred profit sharing plan annuity, but only if the transferring spouse is 65 years of age or older. (There is no age restriction for the spouse who receives the income allocation.)

Pension-related income that is ineligible includes:
• Old Age Security (OAS);
• Guaranteed Income Supplement (GIF);
• Canada/Quebec Pension Plan payments (although there are other arrangements for splitting these);
• RRSP withdrawals;
• Income from some retirement compensation arrangements.

So, a lot of situations where people want to make use of income splitting wouldn’t qualify. For example, if you want to make a simple withdrawal of money from an RRSP whatever your age, it wouldn’t qualify; you’d have to convert it first to an annuity or a RRIF and then be at least age 65.

This means a spousal RRSP will still be worthwhile in many situations for splitting income and saving on taxes.

One example would be if you as a pensioner have a lot of investment income from non-registered investments (ex. dividends, capital gains, income trust income). It may make sense for your spouse to be taxed on more than 50 per cent of total pension-related income (including from RRSPs, RRIFs, etc.). If you had made use of a spousal RRSP, you could do it. If the spouse doesn’t have an RRSP or RRIF, you couldn’t.

Suppose you want to make withdrawals from an RRSP to buy a home. You could effectively double the amount you could withdraw (to a maximum of $40,000 from $20,000) under the Home Buyers Plan if you and your spouse both had an RRSP, including a spousal RRSP.

The same potential doubling would apply for those couples wanting to make RRSP withdrawals under the Lifelong Learning Plan.

Also, spousal RRSPs create flexibility for couples to respond to unexpected events at any age. If, for instance, a couple has a sick child, money in an RRSP (again including a spousal RRSP) could under certain circumstances be withdrawn without paying income tax by the spouse staying home to care for the child.

The benefits of using a spousal RRSP are definitely there if you are under age 65, but they also make sense in certain situations for those who are older.

If you are 65 years of age and over, you would have to convert your RRSP to a RRIF before withdrawals would be eligible under the pension-splitting rules. A spousal RRSP could come in handy if you didn’t want to do that.

In another example, if you are over the age of 69, you cannot contribute to your own RRSP (those over 69 cannot have RRSPs) to shelter employment income from income tax. But if your spouse is young enough to still be allowed to have an RRSP, you could make tax-saving contributions to a spousal RRSP.

Because of the special rules on withdrawals from spousal RRSPs, it is always advantageous to make contributions before December 31 each year. A contribution must stay in a spousal RRSP for three calendar years before it is withdrawn or the withdrawal will be attributed back to the contributor. So, under this rule, if your contribution to the spousal RRSP is made in January or February 2007, your spouse has to wait a year longer (to avoid having the withdrawal attributed back to you) than if the contribution had been made in December 2006.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. His columns are archived at and he can be contacted at

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©2007 Wayne Cheveldayoff