How it works
In addition to splitting pension income as discussed above (which can include splitting your RRSP annuity income), there is another method of effectively splitting income using your RRSP. This requires some long-term planning.
This method is different from that outlined above, in that it involves you contributing to your spouse’s (or common-law partner’s) RRSP, rather than splitting the income once it is received by you out of your RRSP.
For this to be possible, your spouse’s RRSP has to be set up as a “spousal plan”, so that you are allowed to contribute to it. This is trivial to do; you simply ask your financial institution to have the plan designated as such.
Each year you contribute up to your RRSP contribution room for the year. For 2016 this includes:
The lesser of
- $25,730, and
- 18% of your “earned income” for 2015.
(If you are a member of an employer-sponsored registered pension plan, your contribution room will be reduced to the extent of your “pension adjustment” for 2015.)
Furthermore, your unused RRSP room from previous years can be carried forward in this year, and if still unused, it can be carried further indefinitely.
In any particular taxation year, you can use your contribution room to contribute to either your RRSP or your spouse’s RRSP, or a combination of both. For example, if in 2016 your RRSP contribution room is $20,000, you can contribute any amounts to both RRSPs as long as the total does not exceed $20,000. The amount that you contribute is deductible in computing your income, not your spouse’s income.
To the extent that you contribute to your spouse’s RRSP, there eventually will be some income splitting. That is, when your spouse withdraws from his or her RRSP, it will be included in your spouse’s income rather than yours. But as noted, in the year of contribution, the RRSP deduction is from your income. If your spouse is in a lower tax bracket than you, there will be an overall savings in tax.
Beware of attribution rule
The only catch with RRSP contribution splitting is an income attribution rule. Basically, the rule says that if you contribute to your spouse’s RRSP during one year and he or she withdraws that amount in the same year or during the next two years, the withdrawn amount will be included in your income.
In February of Year 1, you contribute $10,000 to your spouse’ RRSP (claiming a deduction for the previous year, Year 0). By year 3, this amount grows to $13,000, and your spouse withdraws the entire $13,000 amount.
In Year 3, you will have to include $10,000 in your income. Your spouse will include $3,000.
The obvious way to avoid this rule is to ensure that your spouse waits until Year 4 (or later) to withdraw the amount, because there will be no attribution.
Note that you cannot avoid this rule by contributing to different plans. If your spouse has multiple RRSPs and you contribute to plan A in Year 1 and plan B in Year 2, your spouse would have to wait until Year 5 to withdraw funds from either plan to avoid having the attribution rule apply.