Spousal RRSPs: What you need to know

This article appears in the March 2022 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

Spousal RRSPs were designed to help married and common-law partners split their future retirement income. Typically, the higher-earning spouse is the contributor and the lower-income spouse is the annuitant and account holder. The contributor spouse can’t exceed their own RRSP limit.

Attribution rules limit income splitting, reducing the short-term benefits of spousal RRSPs. This means withdrawals will be taxed in the hands of the higher-earning spouse, not the lower-earning one as expected.

These rules are complicated (as a recent Federal Court case shows), so make sure you outline them clearly for clients.

Attribution overview

Attribution may apply if the annuitant withdraws from any spousal RRSP and the contributor contributed in the same year as the withdrawal (before or after the withdrawal) or in the two preceding years.

The contributor’s oldest contributions in this period are deemed to be the first amounts used to fund a withdrawal. If the withdrawal is less than or equal to the contributions made in this period, the full withdrawal will be taxed in the contributor’s hands. But what if the withdrawal is greater than the contributions made?

Consider the example of Claire and Gloria. Claire contributes to a spousal RRSP for Gloria. The chart below shows activity from the last four years:

The $5,000 withdrawn by Gloria in 2021 is first applied against Claire’s 2019 spousal contribution ($3,000), and the $2,000 balance ($5,000 minus $3,000) is applied to Claire’s 2020 spousal contribution. Because those contributions were made within the two years preceding the withdrawal, Claire had to include $5,000 in her income for 2021.

The $8,000 withdrawn by Gloria in 2022 is first applied against the 2020 spousal contribution (which had $2,000 applied against it from the 2021 withdrawal, leaving $2,000). The remaining $6,000 of the 2022 withdrawal is Gloria’s income because the balance of Claire’s contributions for the attribution period is now $0. Both Claire and Gloria must include Form T2205 with their tax returns in 2021 and 2022 to report the withdrawals.

The withholding tax of $500 (10% of $5,000) on the 2021 withdrawal and $1,600 (20% of $8,000) in 2022 will be reported on Gloria’s T4RSP, even on the amounts attributed to Claire. Spouses should be aware of this to avoid surprises when filing tax returns.

Exceptions

Attribution won’t apply if at the time the withdrawal is made:

• spouses were living apart because of a relationship breakdown;
• either spouse was a non-resident of Canada;
• the withdrawal was used to purchase a registered annuity that can’t be commuted for three years;
• the contributor died during the year; or
• the annuitant died during the year and was considered to receive the withdrawal.

Other exceptions could help certain clients.

• Eligible withdrawals for the Home Buyers’ Plan (HBP) can come from a spousal RRSP without attribution. The annuitant repays their own RRSP.
• A pension buyback for the annuitant spouse can be funded by a transfer from a spousal RRSP without attribution applying.
• When a spousal RRSP is converted to a RRIF, the minimum payment is not subject to attribution. Only amounts above the minimum payment are subject to attribution based on the rules outlined above.

Bonus points

Here are a few other points of interest.

• Both spouses may be able to contribute to a spousal RRSP, but the attribution rules do not change. Such co-mingled plans are not considered an individual RRSP of the annuitant.
• After a marital breakdown, the spousal designation may be removed, making the account the annuitant’s individual RRSP.
• A contributor spouse can be older than 71 and contribute to a spousal RRSP. The last contribution can be made no later than Dec. 31 of the year the annuitant turns 71.
• If a spouse dies with unused RRSP contribution room, their estate’s representative can make a contribution to a spousal RRSP for the surviving spouse, reducing the tax bill on the terminal return. This contribution must occur before Dec. 31 of the year the surviving spouse turns 71.

When clients request a withdrawal, review the contribution history on the account to determine if attribution will apply, and check the common exceptions. Also, consider how spousal RRSPs can be used when clients experience life events like buying a home, a marital breakdown or retirement.

Curtis Davis, FCSI, RRC, CFP, senior consultant for tax, retirement and estate planning services, retail markets at Manulife Investment Management

Curtis Davis

Tax & Estate

Curtis Davis, FCSI, CFP, TEP, is director for tax, retirement and estate planning services, retail markets at Manulife Investment Management.