While the immediate tax benefits of contributing to a spousal RRSP are the same as contributing to a personal RRSP, further down the line, the real returns can be substantial. With a little planning and careful adherence to the rules, taxpayers and their spouses/common-law partners may be able to equalize their retirement income and, as a result, reduce their future tax liability.
“You can contribute to your own RRSP, a spouse or common-law partner’s RRSP or both, provided you don’t exceed your maximum deductible amount,” says Jeff Buckstein, CPA, CGA of Kanata. “Bear in mind that spousal contributions become the spouse or common-law partner’s property.”
Although spousal contributions reduce the contributor’s RRSP limit, they don’t affect the recipient spouse’s contribution limits for their own RRSP.
“If one partner or spouse belongs to a good registered pension plan and the other does not, the one with the pension plan can contribute to a spousal RRSP,” Buckstein suggests. That ability to contribute, however, can be limited by the plan’s pension adjustment (PA).
According to Canada Revenue Agency: “The pension adjustment (PA) amount is the value of the benefits you earn under your employer’s registered pension plans (RPP) and deferred profit sharing plans (DPSP), and possibly, some unregistered retirement plans or arrangements. Generally, the PA reduces your registered retirement savings plan (RRSP) deduction limit for the following year.”
Once funds have been shifted to the spouse, during retirement, that spouse can draw on their pension and have their partner either leave funds in the spousal RRSP or withdraw them in amounts that would be taxed at lower rates than they would be had the funds stayed with the contributing spouse.
Buckstein cautions that, should some or all the funds be withdrawn from an un-matured spousal plan – that is, before the end of the year in which the recipient partner turns 71 years of age – they might be taxable in the contributor’s hands. This would likely be the case if spousal contributions were made in either the year of withdrawal or the two preceding years.
“But if the spouse or common-law partner without the pension plan should convert their RRSP to an annuity or a Registered Retirement Income Fund (RRIF) and withdraw only the minimum annual RRIF payment that’s required, there would be no attribution to the contributor,” Buckstein explains. The attribution would remain in effect until the end of the year in which the spouse or partner turns 71.
“If you have both a regular and a spousal RRSP and are the annuitant for each, you can transfer the proceeds of one plan into the other prior to maturity,” he continues. “You might want to do this, for example, if you believe it will provide advantages such as administrative ease or a reduction of RRSP fees. The combined new plan would then be classified as a spousal plan. But if you are planning to withdraw money, beware of attribution rules.”
Contributions to a spousal RRSP may be made until the end of the year in which the spouse or common-law partner turns 71, even if the contributor is older than 71, as long as they continue to earn eligible income.
Every situation is different. For advice about the best tax-saving strategies consult a Chartered Professional Accountant in your community.
