RRSP Income Splitting

RRSP income splitting is a highly effective income tax and retirement saving strategy. Sometimes, a spousal RRSP is set up to better split income during retirement. Better split meaning improved tax treatment for each at retirement with the added bonus of improved current tax rates for the higher income earner. The higher income spouse simply makes a contribution to the other’s RRSP and claims the tax deduction. Now, with the investment becoming property of the other spouse, it is withdrawn in the future from the spousal RRSP at the lower income spouse’s tax rate. Income splitting is a powerful strategy to apply to an already great retirement and income tax incentive that RRSPs represent. So much so that the temptation exists to use income splitting as a temporary tax saving measure. Be aware the government applies the rules of attribution to the tax splitting advantage, meaning any funds withdrawn from a spousal RRSP in the three years following the contribution and subsequent tax claim, the withdrawn funds revert back to the contributing spouse as income.


Income splitting works because two moderate income streams are taxed less heavily than a single income stream of the same total amount. If most or all of the family income is attributable to one person, it’s likely to be taxed at a high marginal tax rate. In addition, if both spouses have income from eligible sources, they’ll both be able to claim the federal pension tax credit.


A spousal RRSP is also a good way to split retirement income into two separate taxable streams rather than one large one. So, the benefit becomes four fold. Lower taxes for the two spouses when contributing and lower taxes for the two spouses upon withdrawal.

Other inventive uses of income splitting

1) If you are no longer able to contribute to an RRSP because of age restrictions but would like or need to benefit from the tax advantages, as long as an individual has earned income, a contribution to a spousal RRSP is still possible if the spouse is 71 or younger.


2) Retired persons earning more than $60,800 face a reduced amount of government Old Age Security benefit on a graduated scale. At $98,500, claw back completely eliminates the OAS benefit. Through income splitting, claw back can be reduced or completely avoided by dividing income equally between spouses.


3) It is also allowable to split Canada Pension Plan income with your spouse. Doing this is worthwhile if spouses are taxed at different levels or when Canada Pension Plan benefits are considerably unequal. If both spouses receive the maximum CPP payment it won’t work, but as long as both spouses are at least 60 and there is a tax advantage, up to half of one spouses benefit payment may be transferred to the other.


4) As of 2007, senior citizen couples will be allowed to split eligible pension income. For those over 65, this includes lifetime annuity payments from a registered pension plan, an RRSP, or a deferred profit-sharing plan. For those under 65, only annuity payment from a registered pension plan comply.


5) As a final note, by having the spouse with the lower income make investments, income can be split outside of an RRSP. This will help balance the retirement income stream as well. To do this, the higher earning spouse lends money to the other spouse for investments. Because interest is charged on the loan, the capital gains, dividend income or interest income earned are included in the lower earning spouse’s income, so that way any gains are taxed at a lower rate. The lower earning spouse also gets a tax deduction on the loan interest paid. The higher income spouse must claim the interest in income, so keep it minimal by charging the lowest rate allowed by law.