Tax Planning In Retirement
By Arthur Drache
Almost everyone who has put aside money for retirement knows that an RRSP has to be "wound up" by the end of the year in which the annuitant reaches age 69. This means that the plan must be (1) cashed in; or (2) used to purchase an annuity; or (3) rolled over to a registered retirement income fund (RRIF).
It is commonly believed that the age 69 requirement means a taxpayer can no longer receive deductions for additional RRSP contributions. But, like so many tax "truisms," that is not an accurate belief. Given the right circumstances, a taxpayer may make deductible contributions for many years after age 69.
The Income Tax Act allows a taxpayer to make contributions to a spousal RRSP and there is no age limit involved.
However, there are two functional prerequisites:
First, the taxpayer must have contribution room for the year in which the contribution is being made. Contribution room can include earned income for that year or unused contribution room from a previous year. Second, of course, the taxpayer must have a spouse who is young enough to still be able to have an RRSP, namely under age 70.
If these two prerequisites can be met, there is no provision in the Act that would prevent, say, a 75-year-old from deducting contributions made to a spousal plan. As with ordinary RRSP contributions, the payment must be made into the plan on or before March 1 to get a deduction for the prior years.
Earned income usually means employment income from a business. If the documentation is properly prepared, you can receive qualifying employment income from a controlled private corporation, although you should speak with your tax adviser for guidance on the technique to justify the payments. Director's fees qualify. So does net income from real property and the royalties of an author or inventor.
This is a situation where one can definitely make a virtue out of a necessity. The basic attraction of a spousal plan (at any time) is the ability of the contributor to use tax-deductible dollars to create a retirement fund for a spouse who, presumably, has a lower income. Thus, shifting thousands of dollars a year using a spousal plan will ensure that retirement income is split between the spouses to some degree and can result in both a lower rate of tax and enhanced Old Age Security payments if the higher-income spouse is subject to the clawback.
Generally speaking, there will be no attribution back to the contributor to a spousal RRSP if that RRSP is retained to maturity, though there can be attribution if the funds are contributed and the plan is wound up before maturity. The suspension of the attribution rules means that the recipient of the income from the RRSP is taxed on it, not the higher-income person who made the contribution.
While on the topic of income splitting and attribution, it is also possible to split the right to a Canada Pension Plan annuity under section 65.1 of the Canada Pension Plan. Again, this is attractive when the person with the right to receive the payments is in a higher tax bracket than the spouse. Under the income tax rules, the CPP payment received by the lower-income spouse is not subject to attribution. For a full explanation of how a CPP (or QPP) pension can be split, see the Human Resources Development website.
Good tax planning does not necessarily end with retirement. There are planning options available and the tax savings at this stage of one's life can be worth even more than at other times, given normally diminished income flows.
A dollar of tax saved is worth almost two dollars of income earned -- that's a rule that should be your lifetime guide to tax planning.
Copyright 2002 by Arthur Drache. All rights reserved.
Arthur Drache is a partner in the Ottawa law firm 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.