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Why Pension Splitting Does Not Kill Spousal RRSPs

With the introduction of pension income splitting [1] in 2007 many have argued that the spousal RRSP is dead. However, there are still benefits to the spousal RRSP for income splitting [2] 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:

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 [3]

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 [4].
  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.