By Evan Turner, CFA, CFP
Last week, I had an interesting conversation with a talented and experienced investment advisor. The discussion arose “Are spousal RRSPs really worth it? Especially in the high-net-worth space”.
After discussing the issues, I thought sharing our conclusions from the exchange might guide those through the benefits and drawbacks of spousal RRSPs and help debunk some of the myths associated with them.
First off: What are Spousal RRSPs?
A spousal registered retirement savings plan (RRSP), much as it sounds, is an RRSP opened by a married or common-law couple. The unique feature of this account is that you may contribute money to your spouse or partner’s plan based on your RRSP contribution room, as noted on your Notice of Assessment from CRA. In addition, the contribution allows for an income deduction for the contributing spouse’s tax return.
Why would you do this?
Initially, one question arose as to why one would open a spousal RRSP? I think there are a couple of benefits that can come from structuring your RRSP contributions like this, which I will discuss below.
Benefit #1: This is one way to tax-efficiently move assets from the ownership of the higher-income earning spouse to that of the lower-income spouse. In a sense, it allows one to build up a registered account asset base with a spouse that may not have the capacity to save on their own.
Benefit #2: If the lower-income spouse happens to be younger, this will allow a more extended timeframe for the RRSP assets to remain tax deferred up until the required conversion to a RRIF at age 71 (income starting at age 72). It ultimately saves a few more years of tax-deferred growth rather than being allocated to an individual RRSP in the older and higher-income earner’s name. Additionally, the withdrawals can be based on the younger spouse’s age. Further, RRIF payments are eligible to
Benefit #3: Finally, and most importantly, if planned for properly, this could serve as an income splitting mechanism. More on that discussion below.
You have to pay attention to attribution rules, but income splitting benefits could still be available in the future if planned for. More on this when I address drawbacks, to follow.
Attribution rules state that if you withdraw within three years of your gained deduction from a spousal RRSP contribution, that income would be attributed back to the higher income earner. However, after three years, a spousal RRSP withdrawal would be allocated to the lower-income spouse, thus enabling a form of income splitting.
To help explain this, let’s say a corporate business owner is allocating income to themselves but is restricted to putting income in their spouse’s hands due to the tax on split income rules (TOSI). If planned for in advance, a 40-year-old professional could strategically allocate money to a spousal RRSP, maximizing their RRSP deduction room for, say, five years. They would then not contribute to this spousal plan for three years, and in their late 40s, with the anticipation of income growth through that timeframe, their spouse could now withdraw a portion of the spousal RRSP. Ultimately allowing the professional to draw less out of their corporation, resulting in a lower marginal tax rate.
The spousal RRSP withdrawal could be used for lifestyle expenses, an RRSP contribution to the higher income spouse, TFSA contributions, or simply be reinvested back into the professional’s corporation.
Drawbacks and Myths
As mentioned, the attribution rules are there, and thus one needs to pay close attention to when this withdrawal happens. The timing should be discussed with your wealth advisor and your accountant.
Please remember this is a last-in, first-out determination on attribution; thus, there must be NO spousal contributions for three years for this benefit to work.
Finally, the most common myth I come across is the belief that having two RRSP accounts will double your contribution room. Your contribution limit applies across all RRSP accounts. If a higher-earning spouse contributes to the spousal RRSP, their contribution room will be reduced.
In conclusion, there can be substantial advantages to a spousal RRSP, and it should be reviewed as an option in one’s overall financial plan. Please reach out to your accredited and trusted financial advisors to review if such planning would make sense in your unique situation.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.