By now you probably know the value of investing in an RSP, both
as a savings vehicle for your retirement and as an efficient means
by which to defer taxes on your income. You may also know about the
advantages of income splitting, although most Canadians have
limited opportunities to transfer income from one spouse to another
if both are salaried employees.
Spousal RSPs are one of the only practical means of income
splitting for such couples; they can help defer taxes right away,
and reduce taxes in retirement. If one spouse has a significantly
higher income now, or expects to have a significantly higher
retirement income, you should consider taking advantage of a
Spousal RSP right away.
What is income-splitting?
Income-splitting is a way to reduce a
family's overall tax bill by shifting the income or capital gains
from a higher-income earner to one or more lower income earners so
that the same amount of income is taxed at a lower rate or not at
all if the lower income earner's income is low enough.
Other benefits of income-splitting
Income-splitting also provides benefits
when calculating your Old Age Security (OAS) benefit and any
potential clawback you might face. The OAS program currently
requires a repayment of benefits (or clawback) once your personal
income exceeds $53,215. If you and your spouse can keep your
respective income level below that threshold through
income-splitting, you can avoid any clawback.
How to equalize income in retirement with a Spousal RSP
Spousal RSPs allow a couple to create a
retirement fund for both partners. A taxpayer may choose to
contribute to their own personal RSP or to an RSP in their spouse's
name while claiming the contribution as a deduction on their own
tax return. The immediate benefit to the contributor is the tax
deduction, however, in the long term the overall family tax bill
will be reduced as income will be available for withdrawal by each
spouse during retirement.
As of January 1, 1993, Canada Customs and Revenue Agency revised
the definition of spouse to include common-law spouses. If you have
lived in a conjugal relationship for one year or more, or live
together and have a child, you can make a spousal RSP
Your spousal RSP contribution, when combined with your personal
RSP contribution, may not exceed your personal RSP deduction limit.
For example, let's look at John who earns $50,000 a year. Based on
the current contribution limit of 18% of previous year's earned
income, John may contribute $9000 to an RSP. He can contribute the
whole $9000 to his personal RSP, or $9000 a spousal RSP or a
portion to each RSP as long as the total amount contributed does
not exceed $9000. (Assuming no carry-forward of unused
contributions or over-contributions.)
A spousal RSP is also a way to defer taxes if you are no longer
able to contribute to a personal RSP due to your age. As long as
your spouse is 71 or younger, you can contribute to their Spousal
RSP and still claim the tax deduction.
The three year attribution rule
It is important when considering spousal
RSPs to understand the impact of the three year attribution rule.
This rule is designed to prevent a high-income spouse from
contributing to a spousal plan and having the funds almost
immediately withdrawn and taxed to the lower income earning spouse.
If your spouse withdraws from their spousal RSP within three
calendar years of your last contribution to any spousal RSP, the
withdrawal is treated as income on your personal tax return. If the
withdrawal is made more than three years after the contribution,
the withdrawal is treated as income on your spouse's tax return.
The important thing to note is that the three years are based on
calendar years. If your last contribution was made in December
1998, a withdrawal is taxable as your income until January
If the contribution were made in January 1999, even if it is
applied to your 1998 tax return, a withdrawal before January 2002
would be taxable as your income.
The three year rule does not apply in the following cases:
- The spouses are living apart due to
- Death of the contributing spouse in the
year a withdrawal is made
- Either spouse becomes a non-resident of
Canada for tax purposes
- If the money is transferred to an
Note: If you convert your
spousal RSP into an RRIF, you are only allowed the minimum
withdrawal until three years after the last contribution. Any
withdrawals above the minimum will be taxed as income on the
contributor's tax return.
A spousal RSP offers Canadians an opportunity to work within the
graduated income tax system in order to minimize a household's
overall tax burden in retirement. By equalizing each spouse's
retirement income, the overall tax bill is reduced by keeping both
spouses in a lower tax bracket.
This is one of the few income-splitting options still available
to Canadians, and it is beneficial when most people need it - in