How to Use a Spousal RRSP – RRSP Part 3

This is a continuation from the RRSP post earlier this week. There is a legit way to split the income between two people to minimize their overall taxes. It’s called a spousal RRSP and it’s one of the best tax saving strategies available to couples.

How a Spousal RRSP works

In a spousal RRSP one person makes a contribution, but his or her spouse is the owner of the RRSP plan. The maximum amount of spousal RRSP room the couple can make is determined by the contributor’s RRSP room, not the plan’s owner. Below is an example of a hypothetical couple named Hubby (contributor) and Wifey (annuitant), and how a spousal RRSP can help them.

• Hubby and Wifey are both in the 30% income tax bracket.
• Hubby contributes $10,000 to Wifey’s spousal RRSP. This money now becomes hers, while he gets the tax credit.
• Since Hubby puts money into an RRSP, he becomes $3,000 richer from the tax refund. (To get the refund he just files his annual tax return like usual)
• 2 years later the couple talks about starting a family
• After another year or so a baby is born

• Wifey decides to stay at home to take care of the baby.
• She does not make any money the following year from her job. But she takes out $10,000 from her spousal RRSP account.
• Money redeemed from an RRSP is considered income, but in Canada you don’t pay taxes on the first $10,000 you make.
• So Wifey takes out money from her spousal RRSP tax free.

To summarize, Hubby started with $10,000 of his own after tax income. But by using a spousal RRSP he ended up with $3,000 for himself, and $10,000 for Wifey. Not a bad deal.
And this doesn’t even include any investment income they’ve made over the incubation period from the RRSP contribution to taking the money out again.
Even considering a very conservative 3% annual return, that $10,000 initial RRSP investment would have easily made them an extra $1,000 by the end, all tax free.

Any bank will gladly help people set up a spousal RRSP account. It will be a separate account from someone’s individual RRSP account. The only thing to watch out for is in order for the RRSP withdrawal to be taxed under Wifey’s name, Hubby must not have made any contributions into the spousal RRSP in the current year or the 2 preceding calendar years.
So if Wifey withdraws money any time in 2012, for example, then Hubby must not have made any contributions in the calendar years 2012, 2011, and 2010, because otherwise the withdrawal will be taxed based on Hubby’s income.
There are other small things to keep in mind too. You can find more info on spousal RRSPs in this document, courtesy of Standard Life. I don’t have a family yet, but when I do, I plan to use this strategy.