Viewed from the other side, a spouse RRSP can be converted into a personal RRSP in the event of a break in the relationship or the death of the participating spouse. As a rule, the account holder has to wait until the account has not received any contributions for three years. While this conversion doesn’t require or change the taxation or ownership of the account, some people will appreciate the ability to remove the spouse reference.
Precautions with Spouse RRSPs
While withdrawals from spouse RRSPs are usually taxed in the hands of the account holder – the lower-income spouse – there may be situations where spouse RRSP withdrawals are taxed back to the contributor.
There is a concept called spouse-RRSP mapping. If, for example, a contribution is made to a spouse RRSP in 2019, 2020 or 2021 and a reference is made in 2021, the income can be taxed up to the amount of the contributions in the tax return of the contributor. The income is “attributed” to them. This three year rule is important to remember as a couple nears retirement or otherwise considering RRSP withdrawals.
An RRSP spouse contribution paid in January or February 2019, which was reported in a 2018 tax return, is still considered to be paid in 2019 for attribution if a withdrawal is made in 2021. RRSP contributions in the first 60 days of the year are shown in the tax return for the previous year, but the calendar year of the contribution applies to the spouse RRSP allocation.
Another consideration is that if a spouse contribution has been made to a spouse RRSP in the past three years, spouse imputation could apply to a departure from another spouse RRSP. So the attribution is not based on the specific account but applies to all spouse RRSPs owned by a taxpayer and to which their spouse contributed.
Conversion of a spouse RRSP into an RRIF
If a spouse RRSP is converted to an RRIF, it remains a spouse RRIF. The naming (see above) does not apply if only the Minimum RRIF payout is taken. Withdrawals that exceed the minimum amount can be taken into account if contributions have been made in the last three years. No minimum withdrawal is required in the year that an RRSP is converted to an RRIF, so all withdrawals made in that first year may be attributed.
Spouses can split their income in retirement using the pension distribution in the tax return. Up to 50% of the eligible pension income – including RRIF earnings – can be transferred to the other spouse when a couple files their tax return. This law was introduced in 2007, and since then, RRSPs have been less beneficial to spouses.
However, only RRIF withdrawals are after the 65th spouse so RRSPs can help lower taxes for couples who are retiring early.