The spousal registered retirement savings plan is still an excellent means
for couples to split income and save on income tax, despite Ottawa'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 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 registered retirement income fund, 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;
Guaranteed Income Supplement;
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, such as dividends, capital gains and 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 the payment of 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 Dec. 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 it had been made in December 2006.
Wayne Cheveldayoff is a former investment adviser and
professional financial planner. He can be contacted at
wcheveldayoff@yahoo.ca.