Can You Transfer Your RRSP to Your Spouse?

A Registered Retirement Savings Plan (RRSP) is a Canadian retirement savings tool offering tax advantages. Contributions are generally tax-deductible, reducing taxable income. Investments within an RRSP grow tax-deferred, with taxes paid only upon withdrawal, typically in retirement when an individual may be in a lower tax bracket. While an RRSP is registered to one individual, specific mechanisms allow for the involvement and transfer of these assets in relation to a spouse or common-law partner. This article explores how RRSP assets can be managed or moved to benefit a spouse or common-law partner.

Contributing to a Spousal RRSP

A spousal RRSP is an arrangement where one spouse or common-law partner, known as the contributor, makes contributions to an RRSP registered in the name of their spouse or common-law partner, known as the annuitant. This strategy allows couples to balance their retirement savings and potentially achieve income splitting in retirement, which can lead to overall tax savings for the couple. The contributions made to a spousal RRSP reduce the contributor’s available RRSP deduction limit, not the annuitant’s.

The primary purpose of a spousal RRSP is to allow for future income splitting during retirement, which can result in lower overall household taxes. This is particularly beneficial when one spouse has a significantly higher income than the other. By contributing to a spousal RRSP, the higher-income earner can effectively transfer some of their RRSP savings capacity to their lower-income spouse, who may be in a lower tax bracket in retirement. When the funds are eventually withdrawn by the annuitant spouse, they are taxed in that spouse’s hands, potentially at a lower rate.

A key consideration for spousal RRSPs is the “attribution rule,” designed to prevent immediate income splitting. This rule states that if the annuitant spouse makes a withdrawal from the spousal RRSP in the year the contribution was made, or in the two subsequent calendar years, the withdrawn amount will be attributed back to the contributing spouse for tax purposes. This means the contributor, not the annuitant, will be taxed on that withdrawal.

There are specific situations where the attribution rule does not apply. These include withdrawals made under the Home Buyer’s Plan or the Lifelong Learning Plan, even if they occur within the three-year period. The rule also ceases to apply upon the death of the contributing spouse or if the spousal relationship breaks down.

To open a spousal RRSP, the contributor typically contacts a financial institution where they wish to establish the plan. The account is then set up in the name of the annuitant spouse, who becomes the legal owner of the funds and is responsible for investment decisions. While the contributor claims the tax deduction, the assets within the spousal RRSP belong to the annuitant.

The contribution limits for a spousal RRSP are tied to the contributor’s personal RRSP deduction limit, which is calculated based on their earned income from the previous year, plus any unused contribution room carried forward. The total amount contributed by an individual to their own RRSP and any spousal RRSPs cannot exceed their personal deduction limit.

Transferring RRSP on Death

Upon the death of an RRSP annuitant, a tax-deferred rollover of the RRSP assets to a surviving spouse or common-law partner is permitted. This mechanism avoids immediate taxation of the deceased’s retirement savings, which would otherwise be fully taxable in their final tax return. The primary goal of this provision is to ensure that the surviving partner can continue to benefit from the tax-deferred growth of these retirement funds.

For a tax-deferred rollover to occur, the surviving spouse or common-law partner must be designated as the beneficiary of the RRSP, either directly on the plan or through the deceased’s will. The funds must then be transferred directly to the surviving spouse’s own RRSP, a Registered Retirement Income Fund (RRIF), or an eligible annuity. This transfer must typically be completed by December 31st of the year following the deceased annuitant’s death.

If the transfer is correctly executed, the value of the RRSP is not included in the deceased’s final tax return. Instead, the surviving spouse receives the funds and becomes responsible for paying taxes only when they make withdrawals from their own registered plan. This effectively defers the tax liability, allowing the funds to continue growing tax-deferred.

The process typically involves informing the financial institution holding the deceased’s RRSP of the annuitant’s death and providing necessary documentation, such as the death certificate. If the surviving spouse is the designated beneficiary, the financial institution can facilitate the direct transfer.

It is important to ensure that the transfer adheres to the specified conditions to avoid immediate taxation. Proper beneficiary designation is important for estate planning, as it can streamline the transfer process and ensure the desired tax deferral. Without a proper designation or if the conditions for a tax-deferred rollover are not met, the full value of the RRSP may become taxable in the deceased’s final tax return, potentially incurring a significant tax burden.

Transferring RRSP on Relationship Breakdown

Upon the breakdown of a marriage or common-law partnership, RRSP assets are generally considered part of the shared property to be divided between the former spouses or partners. Tax laws provide a mechanism for a tax-deferred transfer of RRSP assets between former spouses or common-law partners as part of a divorce or separation settlement. This ensures that the division of retirement savings does not trigger immediate tax consequences for either party.

For the transfer to be tax-deferred, it must be made directly from one spouse’s or former spouse’s RRSP (or RRIF) to the other’s RRSP (or RRIF). This transfer does not affect the recipient’s RRSP contribution room. The requirement is that the transfer must be made pursuant to a written separation agreement or a court order. Without such a legal document, a direct transfer would be considered a taxable withdrawal by the transferor and a taxable contribution by the recipient, leading to immediate tax liabilities.

To facilitate this type of transfer, Form T2220, “Transfer from an RRSP, RRIF, PRPP or SPP to another RRSP, RRIF, PRPP or SPP on Breakdown of Marriage or Common-law Partnership,” must be completed and submitted to the financial institution. This form confirms that the transfer is occurring as a result of a marriage or common-law partnership breakdown, as per a legal agreement or court order. Both parties typically need to sign this form.

The general process involves obtaining a written separation agreement or court order that specifies the division of RRSP assets. Then, the financial institutions holding the RRSPs of both individuals are informed. They will require the completed Form T2220 to process the direct transfer between the registered plans. This ensures that the funds are moved without triggering any immediate tax consequences for either the transferor or the recipient.

It is important to remember that while the transfer itself is tax-deferred, any future withdrawals from the transferred RRSP by the recipient spouse will be taxable income at the time of withdrawal. Therefore, both parties should consider the future tax implications when negotiating the division of assets. Additionally, individuals should review and update their RRSP beneficiary designations after a relationship breakdown, as these are not automatically changed and could lead to unintended consequences.