SPOUSAL RRSPS GIVE CLIENTS THE opportunity, in effect, to split income between spouses, with the ultimate goal of equalizing taxable income in retirement.
“If the couple has the same amount of retirement income, then they’re going to pay less taxes,” says Jamie Golombek, managing director of tax and estate planning, wealth advisory services, in Toronto with Canadian Imperial Bank of Commerce. “If one person has a million-dollar RRSP and the other has no RRSP at retirement, that’s not tax-efficient.”
With a spousal RRSP, the higher-earning spouse contributes funds to a spousal RRSP created in the other spouse’s name, up to the amount of the first spouse’s total personal RRSP contribution room. The contributing spouse can claim the associated RRSP deduction on his or her tax return. When the lower-earning spouse eventually withdraws money from the spousal RRSP, that withdrawn amount will be taxed in that spouse’s hands.
Splitting income via a spousal RRSP is an ideal strategy when the lower-earning spouse is expected to be in a lower tax bracket than the higher-earning, contributing spouse.
The contributing spouse can contribute up to their own personal limit only. For example, a spouse with, say, $10,000 in contribution room could contribute the entire amount to his or her own RRSP, or to the spousal RRSP held in his or her spouse’s name. Another option: contribute some portion of the $10,000 to each of the personal and spousal RRSPs. But the contributing spouse can’t contribute more than the $10,000 in total.
The ability to contribute to a spousal RRSP means that upon ultimate withdrawal of that money from a RRIF, the entire amount withdrawn can be taxed in the hands of the lower-earning spouse or partner using the pension income-splitting rules, Golombek says.
“If I had a regular, non-spousal RRSP, I would only be able to have 50% of the ultimate RRIF withdrawals taxed in the hands of my spouse,” he says. “But with a spousal RRSP, my spouse can be taxed on the entire withdrawal.”
Attribution rules, however, limit the ability of the contributing spouse to make withdrawals in the short term without triggering negative tax consequences. The amount of any withdrawal from a spousal RRSP in the year a contribution is made, or in any of the two previous calendar years, is attributed back to the contributing spouse, thereby negating the income-splitting opportunity.
But, unlike pension income splitting, which is a transaction achieved on a couple’s tax returns that involves no actual exchange of cash, contributions to a spousal RRSP immediately belong to the recipient spouse.
“You’ve effectively given your spouse that money,” says Wilmot George, vice president of wealth planning with CI Investments Inc. in Toronto. “Your spouse has control over that money, and can make any investment decision in respect of that spousal RRSP.”
Spousal RRSPs also allow couples to income split at any time, as long as the attribution rules have not been triggered. In contrast, pension income splitting generally is achievable only when a spouse with pension income is over the age of 65.
“If my spouse and I have no spousal RRSP, and all our pension income is in my spouse’s name, then we can’t split any of it until he turns 65,” explains Caroline Battista, a senior tax analyst with H&R Block Canada Inc. in Toronto, by way of example. “If we do spousal RRSPs throughout our lifetimes, then we can withdraw that money before the age of 65.”
Spousal RRSPs also allow a spouse over the age of 71 to contribute to a spousal RRSP and claim a deduction, provided the contributing spouse still has contribution room and the other spouse is 71 years old or under.
“By the end of the year you turn 71, you must convert your RRSP to a RRIF, suggesting you no longer have the opportunity to contribute to an RRSP,” George says. “But if you still have earned income that creates contribution room and a younger spouse, you can contribute to a spousal RRSP.”
The same principle can work in estate planning, George says. An executor can no longer contribute to an RRSP on behalf of a deceased individual and claim the deduction on the deceased’s terminal tax return. However, if the deceased had RRSP contribution room remaining and there is a surviving spouse 71 years or under, a contribution could be made to a spousal RRSP, and a deduction claimed on the terminal return.
Spousal RRSPs remain most popular for couples when there is a spouse without income, who therefore is not building up any assets in his or her own name.
And, notes Battista: “Some would say there’s comfort in knowing that [the non- or lower-earning spouse] has some money in his or her name.”
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