I get questions from readers regarding spousal RRSPs, whether you can transfer your RRPS to a spouse, and what happens to RRSP assets following a divorce or death.
While there are various kinds of RRSP transfers you can carry out from and to accounts belonging to you, there are limits when the beneficiary is someone else.
Read on to learn about when and how you can transfer an RRSP to a spouse.
Can I Transfer My RRSP To My Spouse?
In general, you can’t transfer assets from your RRSP to your spouse or anyone else for that matter without tax consequences.
What this means is you would first have to withdraw the funds, pay the withholding tax on your withdrawal, and then give the remainder to your spouse or partner.
If your plan is to lower the tax burden for your family by splitting income with your spouse, a spousal RRSP is one way to achieve this (more on this later).
If you need to transfer RRSP assets between spouses as a result of a separation or divorce settlement, there are ways to do this without paying taxes right away.
Transfer RRPS To A Spouse Upon Divorce or Separation
RRSP assets may be considered matrimonial property in the event of a separation or divorce.
If RRSPs get on the chopping block to equalize assets between spouses, you can use the CRA’s Form T2220 and transfer funds on a tax-deferred basis.
While you won’t need to have contribution room to receive RRSP funds under these circumstances, some conditions must be met:
- The recipient (annuitant) and the contributor must be living separately
- The funds must be transferred between RRSP accounts
- There should be evidence to show that the parties are separated, such as a court order or written separation agreement
If you had designated a former spouse as a beneficiary to your RRSP account, you could remove them following a divorce or separation.
If not, they may be eligible to receive these assets following your death, even if your Last Will and Testament say otherwise.
One other consideration when transferring or sharing RRSP assets is the after-tax value of the property.
The taxes you will have to eventually pay on RRSP funds should be applied during equalization to estimate their real value.
What is a Spousal RRSP?
A Spousal RRSP is a registered savings plan that allows you to contribute to your spouse’s RRSP.
While you are the contributor, your spouse is the owner or annuitant, and they are the only ones who can make withdrawals from the account.
Spousal RRSPs can help families lower their overall tax burden.
How Does a Spousal RRSP Work?
When you open a spousal RRSP, you have the “contributor” and the “annuitant”.
The “contributor” can contribute to the plan up to their personal contribution limit. In return, they get the tax deductions for these contributions at their marginal tax rate.
The “annuitant” can withdraw funds from the RRSP, and they will pay taxes on any amounts withdrawn.
Spousal RRSPs make sense when one spouse has a significantly higher income (i.e. in a higher tax bracket).
For example, let’s say Jack earns $150,000 annually while his spouse, Jill, has a $70,000 income.
For 2022, Jack can contribute $27,000 (18% of his income) to his RRSP. On the other hand, Jill’s RRSP contribution limit for the year is $12,600.
If their income disparity stays the same throughout their working years, Jack will pay significantly higher taxes in retirement because his RRSP assets and income will be higher than Jill’s.
The couple can split income using a spousal RRSP and equalize their retirement accounts, so they both pay lower taxes in retirement, and keep more money within the family.
Jack will still get the benefit of a higher tax refund because his contributions are deducted at tax time based on his higher marginal tax rate.
Other Benefits of a Spousal RRSP:
- After age 71 when you must collapse your RRSP, you can continue to contribute to a spousal RRSP if your spouse or common-law partner is under age 71 and you still have contribution room. And you can still claim this contribution as a deduction on your tax return.
- A couple can each withdraw a maximum of $35,000 from their RRSPs under the Home Buyer’s Plan ($70,000 total) and put it towards a home purchase. A spouse can make this withdrawal from a Spousal RRSP opened on their behalf.
Downsides of Spousal RRSPs:
- The funds you contributed belong to your spouse. If your relationship turns sour, things could get complicated.
- Contributed funds should not be withdrawn within 3 years of making them. If you fall foul of this rule, the withdrawal is taxed as income in the hands of the contributor (this “attributions rule” is waived if you are divorced or separated).
In addition to transferring RRSP assets to a spouse in a divorce or separation, there are some other RRSP transfers that don’t trigger immediate tax consequences:
RRSP transfer after death: If your spouse or common-law partner is a beneficiary of your RRSP, they can roll over the assets (tax-deferred) to their RRSP following your death.
Also, if a deceased individual has leftover contribution room, a contribution can be made to a spousal RRSP by their legal representative in the year of death or during the first 60 days after the end of that year.
RRSP to RDSP transfers: A deceased person’s RRSP can be rolled over to the RDSP of their disabled child or grandchild.
Retiring allowance to RRSP transfer: You may be able to transfer a retiring allowance to an RRSP on a tax-deferred basis.
For RRSP transfers to another financial institution, check out this guide.