Why Pension Splitting Does Not Kill Spousal RRSPs

by Tax Guy - Burlington Accountant on August 17, 2009 Print This Post Print This Post

With the introduction of pension income splitting in 2007 many have argued that the spousal RRSP is dead. However, there are still benefits to the spousal RRSP for income splitting purposes.

Pension Income Splitting

Effective with the 2007 tax year, up to 50% of pension income can be split with a spouse or common law partner. To qualify, the pension income received must be eligible for the pension income tax credit.

For those who are 65 years or older pension income includes annuity payments from an RRSP and DPSP; life annuity payments from a superannuation pension plan (including LIFs and LRIFs); as well as payments from RRIF and certain regular annuities.

For those under that age of 65 the only pension income only includes:

  • life annuity payment from a superannuation pension plan,
  • payments from a RRIF that is received as the consequence of the death of a spouse or common law partner, or
  • annuity payments from an RRSP or from a DPSP that is received as the consequence of the death of a spouse or common law partner.

Therefore if you are under age 65, your pension splitting options are limited.

Spousal RRSPs

Spousal RRSPs allow one spouse to contribute to an RRSP where the other spouse is the annuitant (i.e. the beneficiary of the RRSP). The spousal RRSP strategy works best when the higher income spouse contributes to the lower income spouses RRSP. During retirement, the lower income spouse can then withdraw from the RRSP and at a lower tax rate.

Side Note: Avoid Spousal RRSP Attribution

Why Spousal RRSPs Are Still Relevant

There are three reasons why spousal RRSP are still relevant.

  1. If you decide to retire before age 65, you and your spouse can draw on your RRSPs equally and achieve the same result as pension splitting. Both withdrawals will be taxed at the same rate.
  2. Pension splitting may impact your entitlement to Old Age Security (OAS) or the Guaranteed income Supplement (GIS).  See my related article, Don’t Fear The OAS Clawback.
  3. If you are no longer able to contribute to your own RRSP because you are over age 71, you can still contribute to a spousal RRSP (if your spouse is under age 71!).

Concluding Thoughts

Splitting pension income provides additional flexibility for seniors but the benefits of a spousal RRSP should but be underestimated.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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Craig Auld August 25, 2009 at 8:18 pm

For 2009 tax year my wife is 66 years old & I (husband ) am 64 .
Can my wife split an $8,000 rrsp withdrawal of her own with me or do we both have to be 65 years old in the same tax year to take advantage of the pension income splitting feature .

Thanks ,
Craig Auld

Tax Guy August 31, 2009 at 8:23 am

@ Craig:

A straight RRSP withdrawal does not qualify for pension income splitting.

Only income that qualifies for the pension income tax credit qualifies. Your wife may be able to create pension income by converting a portion of her RRSP to a RRIF. The RRIF income would qualify and can be split.

Ron. November 23, 2009 at 10:26 am

Is there any “Income Splitting” provision for a childless couple in their late 40’s, other than spousal RRSP’s.?

Tax Guy November 23, 2009 at 10:53 am

@ Ron:

Once you reach age you’ll be able to split RRIF payments and pension plan income (other than CPP).

In the mean-time, the income splitting options available are somewhat limited. If you have any investments outside an RRSP, you should structure your affairs so that the investments are held in the lower income spouse’s name.

For new investments, have the lower income spouse do all of the investing. The income from the investments will be taxed in the lower income spouse’s hands.

For any existing investments, you may consider selling the investments to the lower income spouse at the current fair market value. The lower income spouse must pay for the investments with his or her own funds (i.e. the higher income spouse cannot gift the money to the lower income spouse). If the lower income spouse does not have the funds, the higher income spouse may take a note as payment: The note must pay interest at the prescribed rate (currently 1%) and the interest must actually be paid within 30 days after the end of each year.

Some options may be available should you own a small business corporation but beyond that there would be few if any opportunities.

Joe January 1, 2010 at 11:26 am

Your article is quite clear so thank you for it. One point is still unclear to me, though, regarding spousal rrsp contributions.

Let me try to state it: the higher earning spouse can contribute to a spousal rrsp. But, I believe that is only up to her own contribution limit. What then becomes of the possible contrbution room of the other spouse.

Say, for instance, that my wife has the right to put $10,000 in an RRSP and I have the right to put $1000. She puts $1000 in mine and $9000 in her own. Well, it seems like we are losing out on the possibility of me putting in my $1000. In other words we put in a total of $10,000 when we could have had the right to put in $11,000.

Hope this is clear and looking forward to your answer.

Tax Guy January 1, 2010 at 1:06 pm

@ Joe:
The object is to ensure the amounts in each spouses RRSP is the same at retirement. In your example, if neither of you had ever made RRSP contributions and neither have pension plans, then you need to arrange your contributions such that you wife has $5,500 inside her RRSP and you also have $5,500 in yours.

joe January 1, 2011 at 2:46 pm

I am having a bit of difficulty getting my thoughts around the value of a spousal rrsp contribution in my particular case. The situatation is that I have a small pension but my wife doesn’t. she and i will have CPP.

She has an RRSP of about 500,000. I have about less than half that.

To balance things out I have been thinking about having my wife make a spoulal rrsp contribution into my account this year.

I am wondering, however, whether it is worth the trouble, as I don’t think it will make any difference now, given the income splitting rules.

Am I missing something do you think?

thanks Joe

Tax Guy January 4, 2011 at 8:45 am

There are a few of factors to consider.

You will be able to split pension income with your spouse at any age provided the pension is a defined benefit plan. Otherwise you must wait until you are age 65. Income from a RRIF can only be split if the annuitant (the person entitled to the payments) is over age 65. If you are planning on retiring at age 65, then a spousal RRSP would not be of any benefit.

With respect to spousal RRSP contributions, if you contribute to a spousal RRSP, you take the tax deduction and your wife is the beneficiary of the plan. From a tax deduction point of view it doesn’t matter if you contribute to your own RRSP or your spouse’s.

I hope this helps!

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