If you are single, the tax system offers you limited ways to lower your income. You can contribute to an RRSP for a possible tax refund; you can save and invest in a Tax Free Savings account, and after age 65 you may qualify for the age credit and the pension tax credit. However, if you are in a long-term relationship, you have more opportunities to plan for splitting income and saving on taxes by maximizing the credits available. One option you should seriously consider is the Spousal RRSP to build up your retirement income and manage your tax liabilities as a couple.
The Spousal RRSP is a plan for retirement savings set up for your partner. The amount you are able to contribute to it each year depends on your taxable income, not that of your partner. Thus if you are the higher earning of the couple, it allows you to balance the savings in the two retirement accounts, yours and your partner’s. As a result, once retired, you will be withdrawing and paying tax on lower amounts than if most or all of the savings were in your own RRSP.
Let’s take the example of a couple named Marie and Jo. Marie is a dentist earning $125,000 per year and Jo works part-time earning $25,000 per year. The contribution limit for each of them is 18% of the previous year’s earned income: $22,500 for you and $4,500 for Jo. If they only have individual RRSP’s Marie’s will accumulate far more than Jo’s. When they retire, the withdrawal from Marie’s account will be much higher, and could contribute to pushing her into a higher tax bracket.
Here’s an alternative plan using the Spousal RSP: suppose Jo contributes $4500 each year to her own RSP, and Marie contributes $9,000 each year to a Spousal RRSP instead of contributing all $22,500 to her own; at the end of 30 years, they will have accumulated the same amount in retirement plans. At age 72, minimum withdrawals from the RRIF’s will be equal and each of the partners is more likely to be in the same lower tax bracket.
Another benefit of a Spousal RSP belonging to a partner younger than you is that it allows you to continue contributing to an RSP after age 71 when you can no longer contribute to your own RSP.
Income splitting is available when there is retirement income; however, there is still a big advantage to the Spousal RSP, as tax laws change from time to time. While I don’t anticipate an end to income splitting, it certainly is a possibility; setting up a Spousal RSP as part of retirement planning guards against any danger of that.
It’s important to know a few things when considering this option:
1. The Spousal RSP belongs to the spouse even though you contribute to it. He or she makes the decisions around investments, etc.
2. Attribution rules: Withdrawals from Spousal plan will be attributed back to the contributing spouse if withdrawn within three calendar years of the contribution. Should that happen, the amount withdrawn will be taxed in the hands of the contributing spouse at the higher rate of personal tax.
Couples, whether married or common-law, have tax advantages that singles do not. It pays to know what they are and work with a Financial Advisor to use them to the max.
Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances.