Spousal RRSPS, long a preferred method of income splitting, retain many of their advantages despite the advent of new rules that make it possible for older couples to split pension income for the same purpose.

That is the feeling among advisors who generally agree that contributing to a spousal RRSP is still an effective — and often more flexible — way of equalizing pension income between spouses and minimizing tax liabilities at retirement, assuming one spouse is in a lower tax bracket than the other.

According to Jamie Golombek, vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto, the main reason why many couples will prefer to continue using spousal RRSPs is because of the way in which the pension income-splitting rules define pension income. While the new rules allow pensioners to divide income from RRSPs, RRIFs and annuities, Golombek notes that this type of income can only be divided for tax purposes if the pensioner who is receiving the income is aged 65 or older at the end of the taxation year.

No such restrictions, however, apply to splitting income from a registered pension plan.

Golombek says that unless these rules are changed, which seems unlikely, spousal RRSPs will continue to play an important role for those who wish to retire before age 65 and split income. He advises anyone wishing to retire early, who doesn’t have a registered pension plan, to consider using spousal RRSP contributions — which would allow the ultimate withdrawals to be taxed in the hands of the lower-income spouse or partner without having to wait until age 65.

Brian Quinlan, a partner at chartered accountants Campbell Lawless Professional Corp. in Toronto, also notes that spousal RRSPs offer a more flexible way of equalizing pension income — especially for small business owners who may not have any income from a registered plan but who plan to retire early.

“Spousal RRSPs are still as good as they were before,” says Quinlan, “and their flexibility is much greater than pension income splitting.”

The pension income-splitting rules allow a higher-income spouse with pension income — defined as income eligible for the pension income tax credit — to allocate up to 50% of that income to a lower-income spouse, who would then pay tax on the income at a lower rate. The lower-income spouse must agree to the arrangement.

A spousal RRSP allows one spouse — usually the one with the higher income or the spouse who will have a pension upon retirement — to use part or all of his or her RRSP contribution room to contribute to an RRSP for the other spouse. Taxes are saved when the RRSP income can be shifted to the lower-income spouse in this way. And, unlike pension income splitting, there is no limit on the percentage of contribution room that can be used for a spousal plan.

Also, with a spousal RRSP, the beneficiary spouse actually gets the RRSP assets and benefits from the income. But under pension income splitting, the lower-income spouse has the tax liability but has no right to the income.

Although it is not the primary purpose of an RRSP, assets in these plans can also be used as emergency funds, Quinlan says. Tax can be saved if emergency funds are withdrawn from the RRSP of the lower-income spouse, in whose hands the withdrawal will be taxed at a lower rate. A spousal RRSP may also be a good way to finance a maternity leave, Quinlan suggests, if contributions are timed correctly. Withdrawals will be taxed at a lower rate if they are made while the holder has no earnings.

There are other reasons for contributing to a spousal RRSP. For example, Scott McKenzie, regional vice president and general manager, Ontario region, of T.E. Financial Consultants Ltd. in Toronto, notes that younger couples can make use of these plans to build up assets for their eventual use in the Home Buyers’ Plan. While this plan allows a taxpayer to withdraw up to $20,000 from an RRSP to use toward the purchase of a home — subject to certain conditions — married or common-law partners could each withdraw $20,000 from their individual RRSPs to purchase a home jointly.

@page_break@Mackenzie also points out that contributions to a spousal RRSP can be made up to the end of the year in which the beneficiary spouse turns 71. A taxpayer with RRSP contribution room which has been carried forward from previous years who has reached the age of 71 but has a younger spouse, could go on contributing to the spouse’s plan until he or she also turns 71. IE