The newly introduced family income splitting provision which allows a higher earning spouse to transfer up to $50,000 in taxable income to spouse in a lower income tax bracket (thus providing families with a maximum of $2,000 in tax relief) and other tax-reducing options like a Tax-Free Savings Account (TFSA), may have you wondering if income-splitting through contribution to a spousal Registered Retirement Savings Plan (RRSP) is still a good strategy.
Let’s take a closer look at why a spousal RRSP is a valuable addition to your personal financial plan:
• The higher-earning spouse can contribute to a spousal RRSP, but should be aware of attribution rules. If an amount is contributed by the higher earning spouse to a spousal RRSP, the annuitant spouse must wait at least three taxation years after the last contribution before a withdrawal could be made without affecting the taxable income of the contributor spouse.
• If you’re planning a home purchase or if a spouse is attending a qualified educational institution and has lower income, the higher-earning spouse can contribute to both a personal and spousal RRSP up to their available unused RRSP contribution room. This could potentially double the amounts available for withdrawal under the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP). (Currently the HBP withdrawal limit is $25,000 per participant and the LLP withdrawal limit is $20,000 per participant with a $10,000 annual limit.)
• If a lower-earning spouse exits the workforce to take a parental leave or an educational leave, he or she can receive a payment from a spousal RRSP. In a year of little or no additional income, that person will pay little or no taxes.
• An individual who is over age 71 and has available contribution room can make tax –deductible contributions to a spousal RRSP, provided that the contributions are made before the end of the year in which the spouse attains age 71.
• If a person dies and has unused RRSP contribution room, no contribution can be made to the deceased’s RRSP. However, a final RRSP contribution that is made to a new or existing spousal RRSP within 60 days following the end of the year of death is deductible on the deceased’s final tax return.
A spousal RRSP can be a worthwhile income-splitting strategy, along with other tax planning and retirement savings strategies. Ask your professional advisor which ones will work best for you.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.