Whether you're a pensioner, retiree, or pre-retiree, it's never too early to begin preparing your taxes and take full advantage of the deductions available to you. In addition to contributing to a Registered Retired Savings Plan (RRSP), the following are other means in preparing for retirement.

Income Splitting in Canada

There may be an opportunity to income-split with your spouse through spousal RRSP contribution, or through pension income splitting.

Spousal RRSP

A spousal RRSP is a special RRSP where you make the contributions and get the tax deduction on your tax return, but your spouse is entitled to the future withdrawals from the plan, and hence they pay the tax on future withdrawals.

My spouse already has their own RRSP – is this the same thing?

No. Your spouse's RRSP is one where they make contributions, get the tax deduction, and are entitled to the future withdrawals from the plan.

What's the benefit of contributing to a spousal RRSP?

Using a spousal RRSP is an allowable way to income split with a lower income spouse – this means you could save tax! In the example where one spouse stays at home to raise the children and earns no income, they cannot contribute to an RRSP as they have no earned income. If the working spouse only invests in their own RRSP, upon retirement the working spouse will have all the retirement income to report on their tax return, likely resulting in higher taxes owing. Whereas if the working spouse contributes half to their own RRSP and half to a spousal RRSP, then upon retirement the income will be split between both spouses, which in general would lead to fewer taxes owing. As well, if you are over 71, you can continue to contribute to a spousal RRSP if your spouse is under 71.

Can't we split our RRSP income in retirement using the "pension income splitting provisions"? Why bother with the spousal RRSP?

Spousal RRSP's have been allowable for a long time, whereas the "pension income splitting provisions" have only been around since 2007. Who knows if the "pension income splitting provisions" will still be around when you retire? As well, there are very specific rules to qualify for "pension income splitting." For example, a lump-sum RRSP withdrawal does not qualify, nor do certain RRSP annuity payments made before the age of 65. So, using a spousal RRSP maximizes your flexibility down the road to income split, both before and after retirement.

Can I contribute to a spousal RRSP and have them withdraw it in the same year?

No. To ensure spousal RRSPs aren't abused to income split in the short term, there is an attribution rule that would allocate any income inclusion from the spousal withdrawal to the contributing spouse if a withdrawal is made within two years after a contribution year. For example, if the working spouse contributes to a spousal RRSP in 2008, then no more contributions could be made in 2009 and 2010, and an amount could then only be withdrawn in 2011 without having the income attribution rule apply.

So, I could use a spousal RRSP to claim a tax deduction on my return in 2020, have my spouse withdraw it in 2023 and have it included in their income?

That's right. But this strategy isn't for everyone. First of all, the purpose of an RRSP is long term retirement savings via tax deferral, so doing such a strategy defeats the purpose of the RRSP. However, in cases where a couple needs the cash-flow but wants to benefit from lower taxes, they could use this strategy to income split. The downfalls are the couple would be without the cash for 3 years before the non-working spouse can withdraw the funds without the attribution rules applying, as well this strategy is only effective in four-year cycles as no further contributions can be made in years between the contribution year and the withdrawal year and in the withdrawal year. We suggest seeking advice from a professional accountant and investment advisor before implementing anything contained herein.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.