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Are Spousal RRSP Contributions Becoming Obsolete?

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Marie-Claude Blanchet

After dutifully paying taxes for 40 or years, most Canadians heading into retirement are understandably hoping for a little tax break.

For couples looking to maximize their tax savings upon retirement, one of the main strategies for doing so has traditionally involved spousal RRSPs. By contributing to a spouse’s RRSP (registered retirement savings plan), a couple could shift income from someone in a higher tax bracket to someone in a lower tax bracket. This helps to equalize a couple’s incomes in retirement, so that you’re paying the least tax possible as a couple. (It can also be an effective way to reduce income if a retiree is close to the Old Age Security clawback threshold.)

Then six years ago, the CCRA (Canada Customs and Revenue Agency) gave retiring couples another option.

In 2007, retirees became eligible to income split without having to actually transfer any funds to their partner. This means that 50 per cent of a retiree’s pension can be claimed by their spouse at the time they file their tax return.

In addition, 50 per cent of any RRSP or RRIF income can be claimed by a spouse, as long as the retiree is over the age of 65.

Ever since the advent of the new income-splitting rule, people have wondered: If couples can achieve as much tax savings without transferring funds, why should they bother doing so?

According to Marie C. Blanchet, Senior Consultant for National Bank Financial Planning, there are many reasons why spousal RRSP contributions continue to be a good idea. For one thing, spousal RRSPs allow you to transfer more funds to your partner.

“Spousal RRSP contributions allow income splitting of 100 per cent of new RRSP contributions, while only 50 per cent of income can be shared under pension income splitting rules,” says Ms. Blanchet.

For couples planning to retire before the age of 65, spousal RRSPS become very important to tax planning because there’s no age limit.

“Spousal RRSP contributions can be split before age 65. As the average retirement age in Canada is approximately 61… spousal contributions can be used to make up a shortfall during the transition period,” says Ms. Blanchet. They can also be of benefit if one spouse is younger than the other.

“Contributions to a younger spouse can delay the onset of taxes until the year the younger spouse turns 72,” says Ms. Blanchet.

In addition, the benefits of spousal RRSPs can be felt beyond tax time.

“Spousal RRSP contributions allow investors to double the amount that can be used under the Home Buyers’ Plan (HBP) if one spouse does not already have $ 25,000 accumulated in his or her RRSP,” says Ms. Blanchet. “The same strategy can be used for the Lifelong Learning Plan (LLP).”

Contributing to a spouse’s RRSP helps protect against legislative changes or worse still, the elimination of pension income splitting. And it also provides a way to take advantage of deductions in the event of the death of one partner, says Ms. Blanchet.

“When a taxpayer dies, contributions to his spouse’s RRSP are the only approach available to take advantage of one final deduction and make the most of unused deductions,” she says.

There are drawbacks to consider before deciding on a spousal RRSP. For example, when funds are contributed to a spouse’s RRSP, the contributor loses control of them, as they can be withdrawn by the annuitant or RRSP owner. As well, those funds would be invested in a manner that reflects the account holder’s personal risk tolerance. And depending on your marital status (legally married versus common law) and province of residence, division of the couple’s RRSP’s may or may not occur.

But for many investors, these drawbacks pose few problems compared to the benefits derived from contributions to a spouse’s RRSP, says Ms. Blanchet.

“In general, spousal RRSP contributions allow clients to simplify any income splitting strategy and consequently reduce their income tax payable without the wealthier spouse being taxed on withdrawals,” he says.

“In conclusion, we believe that spousal RRSP contributions remain a vital element of financial planning.”

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