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Spousal RRSP - Is It for You?

 

A spousal RRSP is a special account set up solely in the name of an individual whose spouse is also named as a registered payer (a contributor) of tax-deductible contributions. The contributor gets the tax deduction, but the contributor's benefit stops there. The spouse is the legal owner of the plan and, as such, makes all the investment decisions or withdrawals. The owner can withdraw fund from the account and pay income tax on his/her marginal rate. It is supposed that this rate is lower than the contributor’s rate.

 

One of the few income-splitting opportunities available to couples – spousal RRSPs makes sense when one spouse expects to have a lower income in retirement or child-rearing years. A family with an annual income of $70,000 taxed in the hands of one spouse would pay taxes of $25,000, for example, but split that income equally between them and the tax bill drops to $20,500.

 

You can contribute to a spousal RRSP up to your annual RRSP contribution limit. If you have a contribution limit of $7,500, for example, your combined contributions to your own RRSP and the spousal RRSP can't be more than $7,500. And your contributions don't lower your spouse's contribution limit to his or her own RRSP.

 

How you split your contribution amount is up to you. Each spouse may contribute up to 100 per cent of their available annual contribution limit into spousal RRSP, as well as any remaining room into their individual RSP accounts. It may be appropriate for the spouse, who has a generous pension, to make most or all his contributions to a spousal plan; even if that means the non-pension spouse ends up with more RRSP assets.

 

There are a few restrictions, however, that unless understood at the outset, can hinder the tax-effectiveness of a spousal plan. To prevent abuse, Canada Revenue Agency has strict "attribution" rules concerning early withdrawals.

 

If a spouse makes a withdrawal from a spousal RRSP in the current calendar year and either of you has contributed to the plan in the current year or in the two preceding years, the amount of the withdrawal — up to the amount contributed during this period — is added to your taxable income. Only if no contributions were made to any spousal plans in the three-year period preceding the withdrawal would your spouse be liable for any income tax on the withdrawal.

 


Example
In May 2008, Joshua started contributing to his wife Keri's RRSPs. He contributed the following amounts to her RRSPs:

Year Amount
2008 $2,000
2009 $2,000
2010 $1,000
Total $5,000

 In 2010, Keri withdrew $4,000 from her spousal RRSPs. Before 2010, she had not withdrawn any amounts from her spousal or common-law partner RRSPs.

Keri determines that Joshua has to include $4,000 in his income on line 129 of his 2010 return, since the amount Joshua has to include as income is the lesser of:

  • the amounts he contributed to all spousal RRSPs for his wife in 2008, 2009 and 2010 ($5,000); and

  • the amount his wife withdrew from her spousal or common-law partner RRSPs in 2010 ($4,000)

 Keri does not include any amount in her income for this withdrawal


Source: CRA wesite

 

The word "any" is particularly important here. A withdrawal from a spousal RRSP, to which no contributions were made during the three-year period, will still be attributed to your income if, over that three-year period, contributions were made to other spousal plans, regardless of when they were set up or where they are held.

So if your spouse makes a withdrawal from the spousal RRSP held at Manulife Insurance Company, to which you've made no contribution since it was set up five years ago, all or part of that money your spouse withdrew would be considered part of your taxable income if you contributed to a spousal RRSP held at RBC Dominion Securities Inc. in the last year.

 

Note also the term "calendar year." Making a contribution in January 2009 would mean your spouse must wait until January 2012 before a withdrawal would no longer have any tax impact. A contribution made in December 2008, however, would allow your spouse to make a withdrawal as early as January 2011, in other words in the third year after the year when the contribution was made.

 

Contact us for more information and to discuss your investment and retirement program.

 

If you have any questions or concerns feel free

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Registered Education Savings Plan

RESP: An affordable savings vehicle that can help parents to save money for their children’s post secondary education. Take advantage of :

Canada Education Savings Grant  »

Canada Learning Bond »

Get RESP Illustration for your child

 

Registered Retirement Savings Plan

RRSP: Your retirement program »

Money invested in RRSP is tax deductible and can help you to purchase your first home or pay for your education.

Home Buyer‘s Plan »

Lifelong Learning Plan  »

Spousal RRSP  »

 

Tax Free Savings Account

The TFSA will allow you to set money aside in eligible investment vehicles and watch those savings grow tax-free.  Investment income, earned in a TFSA will not be taxed, when withdrawn.

 

Segregated Funds

Segregated funds: A wide choice of professionally managed invest-ment funds with the security of maturity and death guarantees as well as other benefits.

Segregated Fund Guarantees »

 

 

The maximum RRSP deduction limit

  • 2007 - $19,000

  • 2008 - $20,000

  • 2009 - $21,000

  • 2010 - $22,000

 

 

Home Buyer's Plan  - How to save money for your first home

 

 

Lifelong Learning    Plan  -  How to pay for your education

 

 

Spousal RRSP  - Balance your income with your spouse’s to reduce taxation

 

 

 

 

 

Why RRSP ?

 Tax deduction
 Tax-protected earnings
 Compound interest
 Help to buy your new home
 Pay for your education

 

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Revised: June 10, 2017