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You can help your family with RRSP contributions – but do it right to avoid taxes

I'm in the doghouse again.

Every year, I buy Carolyn gifts that seem to backfire. Two years ago, I thought she'd appreciate the golf clubs I bought her. They're right-handed clubs (she hits left, primarily), and they're men's clubs. Since I hit right, I thought she might be willing to lend them to me now and again. The gift went over very well – but only for a couple of minutes.

This past Christmas, I thought she might like the Story of Us book I bought her. The woman said it would bring tears to her eyes. That it did – but only because I left the pages blank for her to do all the writing. How was I supposed to know to write something in that book? But I digress.

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To make it up to her, I was contemplating giving her a different gift: Money to contribute to her registered retirement savings plan (RRSP) by the March 1 deadline. The problem? It won't work. The taxman says so. Let me explain.

The issue

If your spouse is short on cash to make RRSP contributions but you can help, why wouldn't you? It happens all the time – and no one yet has gone to prison for it. But here's the problem: The Canada Revenue Agency (CRA) says that when you give money to your spouse to contribute to their RRSP, all or part of the withdrawals made from the RRSP will be taxed in your hands – not your spouse's.

How can this be? The CRA has said that an RRSP is "property" under our tax law. If you look closely at the law, it doesn't specifically include RRSPs, but it does define "property" as "property of any kind whatever." It would be hard to exclude RRSPs under this definition.

Since the taxman considers RRSPs to be property, any withdrawals from an RRSP are considered to be "income from property." This opens a can of worms, of sorts. Income from property is subject to the attribution rules under our tax law. You might recall that those rules work so that any income from property can be attributed back to another family member in certain situations.

If, for example, you give money to your spouse to invest, and he or she earns income or capital gains on those funds, that income will be attributed back to you. This includes income resulting from RRSP withdrawals.

So, giving your spouse money to contribute to an RRSP will provide him or her with a tax deduction for that contribution (assuming there's sufficient contribution room), but you'll face the tax on all or part of the withdrawals later.

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By the way, the problem doesn't only arise with your spouse. The attribution rules will also cause income earned by your children to be taxed in your hands in certain situations. These rules apply primarily to minor children, who can't open RRSPs, so there isn't a real concern about attribution of RRSP withdrawals in this case.

But what about adult kids? If you lend money to an adult child (which is treated differently than a gift), it's possible that any income from property earned by that child on those funds could be attributed back to you. Specifically, the tax law says that if you lend money to an adult child, and one of the main reasons for the loan is to reduce or avoid the tax that you might otherwise pay, any income earned on the lent funds will be attributed back to you.

So, if you lend money to an adult child to make an RRSP contribution and the taxman argues that you've done this to reduce or avoid taxes yourself, you could face tax on all or some of your child's RRSP withdrawals later.

Now, it's not an easy thing for the taxman to prove that your intention was to reduce or avoid taxes in this case, but the rule and the risk is still there.

The solutions

Still want to help a family member with RRSP contributions? Consider the following ideas to solve these problems:

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  • Contribute to a spousal RRSP rather than giving money to your spouse to contribute to his or her own RRSP;
  • Your spouse or adult child could borrow from a bank to make RRSP contributions;
  • You can lend money to your spouse or adult child and charge the prescribed rate of interest on the loan (attribution won’t apply in this case);
  • Make a gift, but don’t lend, money to an adult child to help them make RRSP contributions (sorry, this idea won’t work with your spouse).

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.

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