Will spousal rrsps become passé now that federal Finance Minister Jim Flaherty has decided to let seniors do ad hoc splits of retirement plan income?

No. There are several reasons why a spousal RRSP could still be useful.

Flaherty included the income-splitting proposal in his announcement of an income trust distribution tax. Income-splitting and a $1,000 increase in the age credit for low- and middle-income seniors were aimed at appeasing retirees who have embraced income trusts as high-yield sources of cash flow.

The increase in the age credit for those aged 65 and older applies this year. The income-splitting proposal is set for 2007. Under it, income-splitting would be available for income that qualifies for the $2,000 pension income tax credit. This includes payments from:

> registered pension plans (RPPs);

> life annuities;

> life annuities purchased with money from an RRSP or a deferred profit-sharing plan (lump-sum withdrawals are not eligible, according to the Department of Finance);

> withdrawals from registered retirement income funds (RRIFs);

> withdrawals from locked-in RRIF-like vehicles, such as life income funds (LIFs).

DISPARITY IN AGE

The first reason why spousal RRSPs would not be endangered is a disparity between the age at which income qualifies for the pension credit and at which income could be split under Flaherty’s proposal. RPP benefits qualify at any age. Other income streams qualify only for those at least 65 years of age, unless the income results from the death of a spouse or a common-law partner. So, those without employer-sponsored pensions would need spousal RRSPs in order to split income before they turn 65.

That is unless Finance moves to equalize treatment as the proposal goes through the legislative process. Actuary Malcolm Hamilton of Mercer Human Resources Consulting suggests making 55 the pension credit and income-splitting age for both pension and RRSP-related income. (A special exception could reduce that to age 50 for emergency services workers and others who are allowed to retire five years earlier than the norm.)

Jamie Golombek, vice president of taxation and estate planning at AIM Funds Management Inc. , cites three more reasons to keep spousal RRSP contributions in the tool box:

> Flaherty’s proposal would allow retirees to shift up to 50% of their eligible income and, with long-term planning, a spousal RRSP offers the flexibility to split more than 50%;

> a spousal RRSP could double the amount of RRSP money couples can access under the Homebuyers’ and Lifelong Learning plans;

> those over 69 who are still generating earned income could use spousal contributions to make tax-deductible contributions to their partner’s RRSP until the end of the year in which that person turns 69.

Ongoing spousal RRSP contributions also create flexibility to deal with unexpected events. For example, a husband and wife in their 40s may now assume that the lower-income spouse will retain that status in retirement. But, thanks to a career move, inheritance or other unanticipated windfall, this person may end up as the higher-income retiree and find it useful to split income from the spousal RRSP built up over the years. IE