Six Tax Tips for a Special Valentine: Acquiring a Spousal RRSP
Author: Sound Choices
February 14, 2019
RRSP Season Series:
Spousal RRSPs
The content in the below article is meant for Canadian investors only.
Here’s a unique way to share some love with your sweetheart: make a spousal RRSP contribution by March 1. It’s a gift that’s a win-win to help secure your financial future together. Even better, it’s you, the contributor, who gets the RRSP deduction.
Whether you have a spouse or common-law partner, here are six basic tips to know:
1. The basics for individual RRSPs
When a contributor opens a regular RRSP, contributions to that RRSP are based on his or her own RRSP contribution room and age eligibility. Any contributions made to that account may be claimed as a tax deduction by the taxpayer and any later withdrawal (of principal and earnings) from that account are taxable to the taxpayer.
2. How is a spousal RRSP different?
When a contributor opens an RRSP account for his or her spouse or common-law partner, again, he or she may make contributions to that account based on his or her own RRSP contribution room (an advantage if the contributor has higher income and, therefore, more contribution room), and may claim a tax deduction on his or her own tax return for the contributions (which can help reduce that higher taxable income).
Another potential plus: for contributions to the spousal RRSP, the age eligibility rules work to an older contributor’s advantage because they are based on the spouse’s age. This makes the spousal RRSP a great planning tool when the contributor still has RRSP contribution room but is no longer age-eligible, being over the age of 71.
3. Who owns the spousal RRSP?
A spousal RRSP is the property of that spouse, the partner in whose name the account is registered (also known as the annuitant of the account).
Any withdrawals from a spousal RRSP are taxed as income of the spouse (annuitant) unless there have been contributions made by the contributor in the current or previous two taxation years. In that case, the contributor must report the lesser of the contributions in that period and the amount of the withdrawal. Once the three-year period has passed, and as long as no further spousal contributions are made, any income withdrawn from a spousal RRSP will be taxed to the annuitant and not attributed back to the contributing spouse. However, if an additional spousal contribution is made in the future, the attribution rules again apply to withdrawals made in that year or either of the subsequent two years.
4. Exception to the three-year rule: RRIF withdrawals
There is an exception to the three-year attribution restriction.
Spousal RRIFs (Registered Retirement Income Funds) are those that are established with funds originating from a spousal RRSP. The income attribution rules apply only to withdrawals from the spousal RRIF above the minimum amount. As long as the withdrawals are limited to the minimum amount, they will not be attributed back to the contributor, even though contributions may have been made to a spousal RRSP within the previous three years.
Normally, there is no particular advantage to opening a RRIF prior to either spouse turning 65, unless the income is needed by the client (recall, this is the age at which you are eligible for income-splitting benefits with your spouse on withdrawals from an RRSP/RRIF). Once the RRIF is opened, annual withdrawals must be made, and no additional contributions can be made into the account.
5. Transfers between RRSPs
It is also possible to make transfers between RRSPs on a tax-free basis.
However, some caution is required here. It’s true that transfers may be made to or from a spousal RRSP without tax penalties. For example, if the transfer is from a spousal RRSP to that spouse’s regular RRSP, then the regular RRSP also becomes a spousal RRSP. So remember, if you consolidate any of your spouse’s original RRSPs in a spousal RRSP, the consolidated RRSP will be considered to be a spousal RRSP.
6. A retirement plan for your Valentine
Spousal RRSPs are an important component of any tax-efficient retirement income plan for every couple.
It makes sense to contribute in the pre-retirement period, with the goal to equalize income in retirement; this strategy provides a route to tax-efficiency for the couple’s accumulations as a whole. For example, with proper planning, couples may choose to income split later in life and income average for a lower overall marginal tax rate in the retirement period.
Options include withdrawing RRSP funds in a lower-earning spouse’s hands prior to age 65; then income splitting with the higher-earner’s funds at age 65. In addition, it’s possible to structure RRSP income withdrawals between the spouses to avoid Old Age Security clawbacks, or defer Canada Pension Plan or Old Age Security benefits until age 70 to maximize those RRSP benefits.
When in doubt, consult with a tax specialist.
© 2019 Knowledge Bureau, Inc. The contents of this work are copyright protected; all rights are reserved. Users are herewith granted a one-time, limited use license for personal educational use only. This content or any derivative thereof may not be used or reproduced for any other purpose, nor may it be merged, distributed, modified or incorporated in whole with any other intellectual property in any medium or imparted to any party without permission from Knowledge Bureau, Inc. For further information or to request permission for reproduction call us at 1-866-953-4769 or by email at admin@knowledgebureau.com. Please see Policies under About Us on the Knowledge Bureau website for full reproduction policies: www.knowledgebureau.com.
The information contained in this article is based on material believed to be reliable and is provided as a general source of information, based on information available as of October 16, 2018 and should not be considered any personal investment or tax advice. The information provided has been created and vetted by The Knowledge Bureau Inc. Every effort has been made to ensure accuracy at the time of publication, however AGF Management Ltd. and its affiliates cannot guarantee 100% accuracy of this information, and is not responsible for the development and creation of this material. It is important for investors to consult with their financial and tax advisors before making any investment or tax planning decisions.
The commentaries contained herein are provided as a general source of information and should not be considered personal investment or tax advice. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or reliance on the information contained here.
The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.
™ The AGF logo and Sound Choices are registered trademarks of AGF Management Limited and used under licence.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2019 AGF Management Limited. All rights reserved.
