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Topic: Wealth Management

What is a spousal RRSP?

Spousal RRSP

A spousal RRSP is currently one of the only means of income splitting for couples.

If you or your spouse has a significantly higher income now, or expects to have a significantly higher retirement income, then you should look at taking advantage of a spousal RRSP.

Registered retirement savings plans, or RRSPs, are a form of tax-deferred savings plan designed to help investors save for retirement. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year to a maximum of $24,930).

When you later convert your RRSP to a registered retirement income fund (RRIF) and begin withdrawing the funds, they are taxed as ordinary income.

A spousal RRSP is one way to achieve equal retirement income. Suppose you are the higher-income spouse. You can make contributions to a spousal RRSP, and claim the tax deduction. Your contributions to the spousal RRSP will count toward your annual RRSP deduction limits.

Your spouse can still contribute their full deduction to their own separate RRSP. When the money is withdrawn from the spousal RRSP years later, it is taxed in the hands of your spouse. That’s an advantage if he or she is still in a lower tax bracket.

A spousal RRSP is also a way to defer taxes if you are no longer able to contribute to a personal RRSP because of your age. As long as your spouse is 71 or younger, you can contribute to his or her spousal RRSP and still claim the tax deduction.

Note that withdrawals from a spousal RRSP are generally subject to a “three-year rule.” If a spouse withdraws funds from an RRSP within three calendar years after the higher-income spouse’s last contribution, the higher-income spouse must declare the withdrawal as income on his or her tax return. The exceptions include spouses living apart due a marriage breakdown and the death of the contributor in the year a withdrawal is made.

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Paying interest on your spouse’s investment loans

If the lower-income spouse takes out an investment loan from a third party, such as a bank, the higher-income spouse can pay the interest on that loan.

For example, say you’re the higher-income spouse and you make an interest payment on your spouse’s investment loan. As long as you don’t repay any of the loan principal, you do not have to claim any of the investment return on your income taxes. You should, however, make sure to pay the interest with a personal cheque bearing your name, so it’s directly tied to you.

The lower-income spouse would then deduct the interest payments on the loan on his or her tax return, even though the higher-income spouse paid them. This strategy lets the lower-income spouse build up a larger investment base.

Aiming for equal incomes in retirement

The Canada Revenue Agency won’t let a higher-income spouse simply give, or “gift,” money saved or invested to the lower-income spouse. “Attribution” rules apply if you do that. That means the higher-income spouse must pay tax on any gains or investment income from those funds.

That’s why spousal RRSPs are such a great idea. They shift investment capital and income to the lower-income spouse. These will help lower your tax bill right now, and ensure that you and your spouse get roughly the same amount of income in retirement. That will cut taxes later, as well.

Pay your spouse’s bills

The easiest way to accomplish this is to have the higher-income spouse pay the mortgage, grocery bills, medical costs, insurance and other non-deductible costs of family life.

Remember that you have to maintain separate bank accounts and keep accurate records. The higher-income spouse can also pay the lower-income spouse’s tax bill each spring, and any installments that are due during the year.

All these measures will let the lower-income spouse build a larger investment base. They’ll also cut the amount of tax the lower-income spouse pays on investment income earned now and in retirement.

Has a spousal RRSP been effective for you? How are you preparing for equal incomes in retirement?


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