Reduce Taxes with a Spousal RRSP
The main benefits of contributing to an RRSP are the upfront tax deduction, the tax deferral while the funds are in the plan, and the tax savings that occur in retirement when funds are withdrawn at a time when you are in a lower tax bracket. Your tax savings in retirement could be increased significantly if you could split income with your spouse to minimize the amount of income that would be taxed in the higher income tax bracket.

Although the income attribution rules prevent most income splitting strategies between spouses, a spousal RRSP is actually designed to allow income splitting in retirement. If your retirement income will be higher than your spouse's, you should start making spousal contributions to accumulate retirement assets in the lower income person's name.

It is important to consider the benefits of a spousal RRSP prior to retirement to maximize the assets in the other spouse's name. Too often, couples consider this strategy late in their retirement planning so that there is little opportunity to build a spousal RRSP that can provide sufficient income splitting. If all RRSP savings are in one person's name, there is no opportunity to re-direct the contributions. RRSP assets cannot be transferred from one spouse's RRSP to the other's unless there is a marriage breakdown or one of the spouses dies and the assets are rolled into the survivor's plan.

Contributions to a spousal RRSP are based on your available RRSP room and are fully deductible to you. Contributions made to a spousal RRSP do not affect your spouse's own RRSP contribution limit. When withdrawals are made, usually during retirement, they will be taxable to the lower income spouse.

In order for the withdrawals to be taxed in the plan holder's name, the contributor must not have made any deposits into any spousal plan in the year of withdrawal or the two preceding years. If the assets are withdrawn before that time, the withdrawal will be taxable to the contributor. Withdrawals in excess of all spousal contributions in the year of withdrawal and the two prior years will be taxed in the hands of the plan holder.

If your spouse has their own RRSP plus a spousal plan, these plans can be combined; however, Canada Customs and Revenue Agency will consider the combined plan a spousal plan. As such all withdrawals made from the combined plan will be considered spousal withdrawals and will be subject to the 3-year rule described above. The spouse will not be able to differentiate the withdrawals made from their own contributions which would otherwise not be subject to the 3-year rule. When the spousal plan is converted into a spousal RRIF, the 3-year rule will not apply as long as the spouse withdraws only the minimum RRIF payment.

Spousal RRSPs represent one of the few remaining income splitting opportunities. Our team would be happy to speak with you about the benefits of a spousal RRSP. Please contact Mike McPhillips at 416-359-4266 or via e-mail mcphillipsdurkin@nbpcd.com

The comments contained herein are not intended to be a definitive analysis of tax or estate law, and are general in nature. Professional advice regarding an individual's particular tax position should be obtained.