The divorce order has been issued, the assets have been transferred in
accordance with the agreement and the joint-custody arrangement is now in place.
You're thinking the whole matter has been put to rest when your latest RRSP
statement arrives in the mail.
Your statement, which covers the activity and holdings in your spousal RRSP
during the past quarter, still lists your former spouse as the "Contributor."
This is a common and annoying situation that plagues anyone who has recently
divorced or stopped living in a common-law relationship (both opposite and
same-sex, as both are considered equal under tax law). Before dealing with how
to eliminate your ex's name from the RRSP, let's review the purpose of a spousal
RRSP.
A spousal RRSP is any RRSP to which one spouse or partner has contributed,
where the other spouse or partner is the annuitant or owner of the plan. It is
often used by spouses to accomplish post-retirement income splitting -- funds
withdrawn from a spousal RRSP are taxed in the hands of the annuitant spouse
instead of the contributor spouse. If the annuitant spouse is in a lower tax
bracket than the contributor spouse in the year of withdrawal, there may be tax
savings.
So, you want to remove your ex's name as the contributor on your RRSP
account?
You would think that this would be straightforward, necessitating nothing
more than a simple phone call to your financial advisor. Unfortunately, due to
the Canada Revenue Agency's concerns regarding the "spousal RRSP attribution
rule," this isn't as easy as you think. The special anti-avoidance rule is
designed to prevent short-term income splitting. Simply put, if the annuitant
spouse withdraws any funds from a spousal RRSP within three calendar years of
any contribution being made, the withdrawal will be attributed back to the
contributing spouse and taxed in his or her hands.
Luckily, this rule does not apply if the spouses or partners are living
separate and apart at the time of withdrawal by reason of the breakdown of their
marriage or common-law partnership.
So, why can't the contributor's name and thus, the "spousal" flag on the
account, be eliminated?
Until fairly recently, the CRA's response has been that "even divorced
couples may reconcile and therefore, the attribution rules may conceivably apply
again." After much criticism, the CRA relaxed its position, allowing the issuer
of an RRSP to remove the information about the contributor from the plan
provided certain conditions are met.
The first condition is that the RRSP issuer must have proof that the
annuitant and contributor spouse are living apart because their partnership has
broken down. This proof may take the form of a simple written statement signed
and dated by the annuitant or a copy of the separation agreement or divorce
decree.
The second condition is that there must be no spousal contributions to any of
the annuitant's RRSPs for the year of the request and the two previous years.
This could also be evidenced by a written statement from the annuitant.
Finally, the last condition is that there can be no withdrawals from the
spousal RRSP during the year of the request.
Once these conditions have been met, the RRSP issuer can remove the spousal
contributor's information from your spousal RRSP. Even better, the property in
your spousal RRSP can be combined with any other RRSPs you own, with the added
benefit of possible savings on annual RRSP administration fees (generally
charged per account).