Spousal RRSPs – why you should do it anyway

Recently in the Globe & Mail, the always sharp and informative writer, John Heinzl wrote a column about spousal RRSPs. These are RRSPs set up by a higher-income earning spouse in favour of the lower income-earner.

The higher earner, in making the contributions, receives the upfront tax benefit. Any subsequent withdrawals by the lower income-earning spouse are taxed in the lower income-earner’s hands. That saves tax.

The question, though, is whether spousal RRSPs remain relevant given the new income-splitting rules. The answer is – yes.

First, note that contributions should not be withdrawn within three years. Otherwise they may be taxed in the higher earner’s hands.

However, there still are important benefits in setting up a spousal RRSP. One is that a spousal RRSP permits a higher level of income splitting.

All contributions to the spousal RRSP are taxable in the hands of the lower-income spouse if funds are withdrawn. With a regular RRSP, once it’s converted to an RRIF, only 50% of the RRIF income can be split with a lower-earning spouse.

Also, an older high earner can continue contributing to a spousal RRSP after age 71, provided the lower-earning spouse is under the age of 71. For subsequent relationships, a spousal RRSP can be extremely beneficial, depending on the sources of income the spouses have.

I strongly recommend a discussion with your advisor.

This ad ran in the Richmond Review on November 21, 2014.