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Why smart couples use a spousal RRSP

By Arthur Drache

Many people who are otherwise knowledgeable about the tax system get confused about spousal RRSPs and how they differ from a normal plan that happens to be in the name of a spouse.

In a nutshell, the tax rules allow an individual to use his or her RRSP limits to make a tax-deductible contribution to a special RRSP set up in the name of a spouse.1 The contributor gets a tax deduction for the amount contributed, but the annuitant is the spouse. When the spouse starts making withdrawals from the RRSP (or the registered retirement income fund if at age 69 the RRSP had been transferred to a RRIF), the payments are taxable to the spouse who is the annuitant.

Special rules limit the collapsing of the spousal RRSP during the first three years after a contribution is made to eliminate income splitting in that time.

The key point is that the contributing spouse uses his or her RRSP contribution room and gets the deduction. Every dollar paid to the spousal RRSP reduces the amount that can be contributed to the RRSP of the contributor. This does not preclude the other spouse from contributing to another (non-spousal) RRSP if he or she has contribution room.

The spousal RRSP is attractive in two particular situations:

First, if one spouse is over age 69 and cannot have his or her own RRSP but has earned income, the spousal RRSP allows a contribution to be made and a deduction claimed. For example, a 72 year-old practising lawyer cannot contribute to an RRSP in his or her own name, but can make a deductible contribution to a plan for a 65-year-old spouse.

Second, the spousal RRSP may still be attractive if you have high earned income and the right to contribute to your own plan. If you are contemplating a retirement where your income will be more than adequate but your spouse will have low post-retirement income, contributing to a spousal RRSP will increase your spouse’s post-retirement income, which will presumably be taxed at a lower rate than your own.

It is an ideal, legal income-splitting device for retirement, offering top-level tax breaks now and promising low taxation when the funds actually come out of the plan.

But is it possible to maximize contributions to your own plan and still move money to your spouse’s plan? It can be done with a bit of discipline - or nerve.

Consider Frankie, who is 60 years old, earning significant income and making the maximum RRSP contribution each year. Johnnie, his spouse, is a retired civil servant and has a pension of just $30,000 a year.2 Johnnie does a small bit of consulting work and, despite her retired status, has build up an RRSP contribution limit of $5,000 as shown on her tax assessment for 2001.

Usually Johnnie pays for the family groceries out of her own bank account - payments which amount to about $5,000 a year. If Frankie were to take over the grocery payments for a year, it would free up $5,000 for Johnnie to contribute to her own RRSP. In this event, both would maximize their
2002 RRSP deductions.

So why doesn’t Frankie just give Johnnie a cheque for $5,000 to contribute to her RRSP? The technical reason is that the tax authorities view such a transaction as one that would trigger the income-attribution rules - which would require Frankie to report as his own income the income from Johnnie’s RRSP. (Many tax advisers think this is a wrong interpretation of the law, but that is another matter.)

However, as many commentators have noted, there is a lot of evidence that the Canada Customs and Revenue Agency (CCRA) will not look at this sort of transaction. Therefore, if Frankie doesn’t report the RRSP income as his own, nothing will happen. We have never seen a single reported case on this sort of situation, which tends to support the notion that this is not a scheme that the CCRA is particularly concerned about.

But if you are among the many who are completely risk averse with regard to tax matters, there may be other options.

Frankie and Johnnie have several kids who are all well established. The kids give Johnnie $5,000 for an RRSP contribution. The income attribution rules do not apply to money transferred from a child to a parent. At some stage, Johnnie gives the kids a gift of $5,000. Because the children are all over 18, there would be no attribution with regard to that gift.

So at the end of the day, Frankie and Johnnie have maximized their RRSP contributions and deductions and, at the same time, fostered a more equitable flow of income at retirement.

1Thus a spouse might have a “normal” RRSP that is subject to the regular rules and a spousal RRSP that has certain limitations.
2 A young person in our office wondered if Frankie and Johnnie were gay, notwithstanding the pronouns. He obviously wasn’t much into American folk songs. Of course, if they were gay and in a common-law relationship, the comments in this piece would apply equally to them.

Copyright © 2003 by Arthur Drache. All rights reserved.

Arthur Drache is a partner of Drache, Buchmayer, LLP and specializes in all areas of personal tax and estate planning. The opinions and views expressed herein are those of the author and not those of CI Investments Inc. CI Investments Inc. does not necessarily endorse or encourage any specific tax strategies. Please consult a tax professional for advice specific to your particular situation.

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