Monday, October 4, 2010

Spousal RRSP

Spousal RRSP is where one spouse owns the account (annuitant) but the other makes the contributions (contributor).

Process: One spouse opens an account (annuitant) and other spouse will be the contributor and the contribution receipt will be issued in the contributor’s name and contributor claims the RRSP deduction.

Who should use? If one spouse earns significantly higher income than the other and the annuitant is planning to withdraw when his\her income is lower than the contributor.

Before 2007, spousal RRSP was marketed as income splitting opportunity for retirement income but it is not a benefit any more due to pension splitting rules for pensioner over the age of 65 for income from RRIF (RRSP can be converted to RRIF) but it is still a great income splitting tool for younger couples if they are planning to withdraw before the contributor turns 65.

Special scenarios: It is also useful in following special scenarios:

  • One spouse is older than 71 but still has contribution room and other spouse is younger than 71. Spouse older than 71 can be contributor and spouse younger than 71 can be the annuitant or

  • The estate of the deceased (assumed deceased has contribution room) can make contribution to the spousal RRSP, if the spouse is alive and below age 71 (deceased will be the contributor and spouse will be the annuitant). The amount can be claimed as RRSP deduction in deceased’s final return.

What are the benefits?  The higher income-earning spouse claims the RRSP deductions but the withdrawal will be taxable to the lower income spouse when the lower income spouse withdraws it.

Important rule: If the funds are redeemed within 3 calendar years (3 year attribution rule) of the last spousal RRSP contribution, the amounts contributed within the 3 calendar years will be taxable income for the contributor.

Here is an example:
Bill and Laura are married couple (both aged 45 years) and Bill makes 100K and Laura makes 25K. Bill and Laura opened a spousal RRSP account in Laura’s name (Laura is the annuitant) but Bill is the contribution. If Bill contributed $5K (assumed he has contribution room) each year from 2003 to 2007 and he received a contribution receipts for 5K each year for RRSP deduction and claimed the deduction in his Income Tax Returns for 2003 to 2007.

Let’s say Laura decided to work part time from 2010 and decided to withdraw 5K each year to compensate loss of income. The 5K withdrawals will be taxable income to Laura. Attribution rule will not apply since the last contribution was made in 2007 and first withdrawal was made in 2010 and three calendar years cover 2007,2008 and 2009.

Bill received deduction against his income for contributions made from 2003 to 2007 for the spousal RRSP contribution.
Laura’s received withdrawal (income splitting opportunity) in 2010 and will receive for future years as well.
Laura will pay tax at a lower rate for the withdrawals, as her income is lower than Bill.

I like the brochure from Standard Life as it takes into consideration the pension splitting that came to effect in 2007


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