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
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.