November 16th, 2004

Blurb: Putting money in your RRSP is a great tax deferral strategy. But investing in your spouse's plan may provide even more benefits.

The comfort of a spousal RRSP

By Peter Diekmeyer o

As the year comes to a close, Canada's savers are again checking to make sure that they have enough money available to top off their Registered Retirement Saving Plans. But while RRSPs are one of the best tax deferral strategies around, the lesser-known spousal RRSPs take those advantages several steps further.

Spousal RRSPs are just like regular RRSPs, with the key exception that contributions are made by the higher income spouse, into the lower income spouse's plan.

If the lower income spouse already has an RRSP, a separate plan must be said up that includes the contributions made by their spouse. That's because the rules governing the withdrawal of contributions from spousal plans are different from those related to conventional plans.

The benefits of a spousal RRSP

A spousal RRSP brings significant benefits to both the contributor and the beneficiary. These benefits include income-splitting opportunities as well as the ability to maximize key deductions and to reduce the effects of claw backs from various means testing programs.

The most immediate tax saving opportunity occurs when the contributor puts money into his spouse's plan. The contributor is generally the higher income spouse. Since he is typically in a higher tax bracket, he gets a larger tax refund than his spouse would if she had made the contribution herself. (Men generally earn more than women in Canada and thus contribute more to spousal RRSPs)

Income splitting

Spousal RRSPs also bring big advantages when the money is eventually withdrawn from the plan upon retirement. For example if two spouses withdraw $30,000 a year each from their RRSPs, then both benefit from the lower tax rates at the lower income brackets, while a single spouse who withdrew $60,000 a year, would be propelled into a higher bracket.

"The ideal is that you should plan your retirement so that both spouses have similar income levels," says Evelyn Jacks, a tax expert and author of "Tax Savings for the Long Run."

According to Jacks, the benefits of spousal RRSPs go far beyond mere lower tax rates.

"If two spouses have RRSPs then both can benefit from the non-refundable pension tax credit," says Jacks. "That works out to 16% of the $1,000 base amount, plus amounts provided at the provincial level that differ based on where you live."

Splitting income by setting up a spousal RRSP can also help reduce or even eliminate the Old Age Security claw back, which kicks in when income hits $59,789. For example one spouse with $100,000 in annual income, would have a significant portion of his Old Age Security payments clawed back, while two spouses with $50,000 a year each in income, would see no effect. The same principal applies to the old age credit claw back, which kicks in once you income hits $29,124.

The pitfalls of a spousal RRSP

The biggest pitfall of setting up a spousal RRSP is that the lower income spouse must wait three years after the last contribution was made to her plan, before she can take the money out without certain income-attribution provisions taking effect.

The rule came about because the federal government wanted to prevent couples from setting up a cycle whereby one person contributes to the other's plan, benefits from the deduction, and the next year the other spouse withdraws the money at a lower rate.

To prevent such a cycle, the rules state that the contribution portion of any withdrawals made from a spousal RRSP, --inside the mandated three year waiting period --are attributed back into the taxable income of the contributor. However the interest income earned in the plan during that time would be taxed in the hands of the spousal plan holder. That's means if you need to get your money of the spousal plan in a hurry, you could pay a significant tax penalty.

Jacks suggests that there are ways to minimize the damage by --for example --taking out half of the early withdrawal amount in December of one year, and the other half in January of the next year. That way the income tax paid is split between two taxation years and the separate withdrawal amounts may fall in a lower bracket than if they were combined.

One pitfall that you do not need to worry too much about is the case in which = one spouse contributes to another's RRSP for many years but a divorce ensues, says Jacks.

"The assets are split 50-50 in most divorce cases these days," says Jacks. "And the courts make special provisions when RRSPs are transferred as a result of a divorce, so the plan does not have to be collapsed."

How to set up a spousal RRSP

Setting up a spousal RRSP is just a simple as setting up a regular plan. Any major financial institution will be glad to help. Just make sure that if your spouse makes contributions to your plan that you keep these amounts separate from the contributions that you made yourself. And keep track of them, especially in cases where you think that an early withdrawal might be in the cards, because you don't want to be hit with the attribution rules.

And most important says Jacks, if you have any questions you'd be better off talking to your tax planner during your annual meeting with them. You don't want to play game with your retirement.


For additional information you can check out the following CCRA links:

IT-307R3 Spousal Registered Retirement Savings Plans

T2205 Amounts from a Spousal or Common-law Partner RRSP or RRIF to Include in Income:


Peter Diekmeyer is the Montreal Gazette's management columnist. He can be reached at:


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