This column, written and published by Investors Group Financial Services Inc. (in Quebec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
The Tax-Free Savings Account (TFSA) and other federal tax initiatives may have you wondering about the value of one of the most basic tax-saving strategies for couples: Income-splitting through a spousal Registered Retirement Savings Plan (RRSP).
A spousal RRSP can still be a worthwhile way to reduce your family tax bite in certain situations. Here’s how income-splitting can work for you:
- It provides a means of reducing a family’s overall tax bill by shifting income from a higher earner to the lower-income earner so that family income is taxed at a lower rate.
- It may allow a couple to avoid a clawback of Old Age Security (OAS) benefits by keeping each partner’s income below the prescribed threshold.
- Canadian retirees are allowed to split up to half of their eligible pension income (i.e. income that qualifies for the federal Pension Income Tax Credit) with their spouses or common-law partners. In addition, income-splitting with ‘non-spousal’ RRSPs is also permitted, but only after the contributor reaches age 65 and the RRSP is converted to a RRIF.
Here’s when a spousal RRSP can be a valuable addition to your personal financial plan:
- If you and your spouse intend to retire before age 65, the higher-earning spouse can contribute to a spousal RRSP but stop making those contributions three years before retirement. After retirement, the lower-earning spouse makes withdrawals from the spousal RRSP. Because no contributions had been made to the spousal RRSP during the previous three calendar years, none of the spousal RRSP income paid to the lower earning spouse is attributed to the higher earning spouse for taxation purposes.
- If a lower-earning spouse exits the workforce to take a parental leave or an educational leave, he or she can receive a payment from a spousal RRSP. In a year of little or no additional income, that person will pay little or no taxes.
- If one of you continues to work after age 71 and generates “earned income” for RRSP purposes, that person can no longer contribute to their RRSP but can contribute to a spousal RRSP until the end of the year that the spouse attains age 71.
- If a person dies and has unused RRSP contribution room, no contribution can be made to the deceased’s RRSP. However, a final RRSP contribution that is made to a new or existing spousal RRSP within 60 days following the end of the year of death is deductible on the deceased’s final tax return.
Is a spousal RRSP a worthwhile income-splitting strategy for you? Ask your professional advisor about income-splitting and other tax planning and retirement savings strategies that can benefit you and your family.
David Cameron Moore is a Financial Consultant with Investors Group Financial Services Inc., practicing financial and investment planning, and insurance, tax, and estate planning with successful individuals and families in KW Region. Find him online at davidcameronmoore.com