The contribution room that everyone generates by having earned income enables contributions to be made to either one’s own plan or that of a spouse. The age 69 limitation applies in both situations. Plan transfers and retiring allowance receipts only can be made to one’s own plan. Transfers can be made from one spouse’s plan to the other spouse’s plan upon death or divorce.
Ordinarily, whether to make spousal contributions or not, is based upon long term retirement planning goals. However, sometimes short term income splitting opportunities are the main motivation. The couple can gain if the higher tax bracket party makes a spousal contribution which is subsequently withdrawn and taxed in the hands of the lower tax bracket party, for instance to fund a maternity period.
While the government does not actively prohibit or encourage this, it has created the so-called “three year attribution” rule to confound such a strategy.
This rule attributes de-registered withdrawals from the plan annuitant back to the contributor spouse to the extent of all contributions made in the year of withdrawal and the preceding two calendar years. Note that this time test is based upon the year of contribution, not the year of deduction.
The three year attribution rule is waived if:
- the contributing spouse dies in the year
- the annuitant spouse’s RRSP is used to purchase an annuity which cannot be commuted for at least the offside years
- the annuitant spouse’s RRSP is transferred to a RRIF and only the minimum amount is withdrawn each of the offside years. Withdrawals beyond the minimum amount are subject to the three year attribution rule.
Where an RRSP has contributions co-mingled by both the annuitant and the spouse, and funds are withdrawn which fall under the three year attribution rule, the law presumes that the spousal contributions were deducted first.
- To maximize long term retirement savings, ideally each of a couple generally should be making their maximum contribution annually. However, where either one of them is in a low tax deduction bracket or family cash flow is constrained from making full contributions, the higher tax-bracket person should maximize contribution before the lower bracket person makes a contribution.
- A couple should decide deliberately whether their contributions should be spousal or not based upon long term retirement planning goals and whether the funds may be needed prior to retirement (and potentially within three years).
- If you wish to make spousal contributions and plan to withdraw them to fund maternity leave or some similar period of low income, manage the three year black-out period accordingly.
- If a couple wishes to make RRSP contributions to withdraw for a future maternity leave or some similar period of low income, two RRSPs could be set up for that party; one for spousal contributions which will remain intact for the long term and one for the withdrawing party. This latter RRSP would be the one from which withdrawals would be made to fund the future low-income period. This strategy would achieve the financial goal without falling into the attribution rule.