I worked for a firm once where the division manager had a special technique for selling spousal RRSP's. If he felt that there was some uncertainty about his making the sale, he would look over at the husband and say "What better way to show your love for your wife than to give her a spousal RRSP?". The wife would invariably glance at her husband with an expression that said "Well, do you love me or not?". The husband was cornered and would almost always pull out his cheque book.
Valentine's Day is almost upon us and we may be feeling especially fond of our loved ones. However, I must warn you, there are many good reasons for purchasing a spousal RRSP, but love isn't one of them.
There are four good reasons for contributing to a spousal RRSP:
If as a couple, you have a limited amount of money to contribute to an RRSP, the spouse with the higher income
should always take the deduction right up to the point where the income of each spouse after the RRSP deduction
becomes equal. In other words, if one spouse earns $50,000, the other earns $45,000, and between you, you have
$8,000 to invest in an RRSP, providing you have the contribution room, the first $5,000 invested in RRSP's should
be invested by the higher income spouse. The remaining $3,000 should be split evenly between the two spouses in
order to get the maximum tax return.
The higher income spouse can invest the RRSP in his or her own name or that of their spouse. The spousal RRSP allows the higher income spouse to obtain the much needed deduction while at the same time ensuring that the lower income spouse has an amount set aside from which to draw a retirement income. The also allows us to take advantage of a technique called "income splitting".
Here in Canada we have a graduated tax system where the more that one earns, the higher the rate of tax paid. There are two concerns that must be looked at: 1) paying the least amount of tax today, and 2) paying the least amount of tax upon retirement.
The first concern is accomplished by the higher income earner taking the deduction. The other concern is addressed by planning your affairs in such a way that spouses have a more or less equivalent income at retirement.
I have one client who has a pension plan at work and his wife doesn't work. Each year he makes a spousal RRSP contribution rather than contributing to his own RRSP. This strategy will permit both spouses to have a retirement income and pay less tax.
When considering income splitting for tax purposes at retirement, look at all sources of retirement income. There could be company pension plans, government pension plans, rental income, income from investments and income from registered plans. The goal is to try to get the amount on line 236 on your tax return as close to each other as possible.
There may be cases where you know that one or the other will have a lower income in a few years. This would happen where a spouse decides to stay home to look after children or perhaps to return to school or follow a training course. In these periods of relatively lower income, it may be possible to remove funds from the spousal RRSP and pay much less tax.
To discourage couples from taking advantage of this in an abusive manner, there are certain consequences if a spouse contributes to a spousal RRSP one year, and the other spouse withdraws the funds within the two years following the RRSP contribution. The funds will be taxed in the hands of the contributor, and not in the hands of the spouse who withdrew the funds.
Another occassion where it makes a lot of sense to contribute to a spousal RRSP is in the case where one spouse is over 69 and the other spouse is younger. Provided the spouse over age 69 has the contribution room, he or she can still get an RRSP deduction by contributing to a spousal RRSP.
To obtain more information about spousal plans from the Canada Customs and Revenue Agency, read the 9 page "IT307R3 Spousal Registered Retirement Savings Plans" which can be found here: http://www.ccra-adrc.gc.ca/E/pub/tp/i307r3et/i307r3e.txt.html
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