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rrsp decision time

As soon as there is a disparity in income between partners, a spousal RRSP should be put into play

Alex and Sana Ghani at home in Mississauga. Alex is an chartered professional accountant while Sana also works in the financial services industry.Moe Doiron

Alex Ghani has always looked to the distant future when it comes to his family’s financial planning. Back in 2009, at only 33 years of age, Mr. Ghani began contributing annual funds to a spousal registered retirement savings plan (RRSP) established in the name of his wife, Sana.

Sana Ghani currently works outside the home, but she stayed out of the labour force for several years to raise the couple’s three sons – Nyal, nine, Aariz, six and Mikhail, four.

“The spousal RRSP enables higher-income-earning spouses like me to put retirement money away for a lower-income spouse. The contribution I make gives me a larger tax deduction in my high-income years. Then, over the long-term Sana and I will have the opportunity to income split when we’ve retired,” says Mr. Ghani, a chartered professional accountant and partner with CPA Solutions LLP in Thornhill, Ont.

Even though the March 1 deadline for 2018-related contributions to an RRSP will soon be here, experts stress that these contributions, including the spousal RRSP, are most effective as part of a multiyear, long-term strategy, and Canadians should always be thinking ahead to the next taxation year – and beyond.

“The spousal RRSP is ideally suited for long-term planning,” says Alicea Robb, managing director of tax and accounting for TMFD Ottawa Professional Corporation, an Ottawa-based CPA firm.

Alicea Robb, managing director of tax and accounting for TMFD Ottawa Professional Corporation, an Ottawa-based CPA firm.Handout

Canada has a progressive tax system where tax rate brackets rise at certain levels of increased taxable income.

If at retirement, for example, one spouse had $1-million in RRSP savings and the other spouse had no savings, the family would be taxed at a higher rate if one spouse withdrew from his or her $1-million plan, compared to equal withdrawals made by each partner with $500,000 in their respective RRSPs, Ms. Robb says.

Ideally, spousal RRSP planning should start as early as possible, as soon as there is a disparity in income between spouses or common-law partners.

“If a couple each makes the same money, and they’re putting about the same amounts into their individual RRSP plans, then a spousal RRSP is not going to add a lot to their mix,” says Jason Kingston, a principal with DSK LLP in Kitchener, Ont.

“But as soon as you’re in the situation where you’re talking about maybe one of the spouses staying home, or one spouse has a much higher earning potential, or current earnings, at that point I would open up a spousal account, and try to keep the retirement assets available somewhat reasonably balanced between the two,” he says.

The RRSP contributor can elect to split their annual contribution amount between their own RRSP and that of their spouse. The annual contribution limit for the 2018 tax year, for example, was 18 per cent of the previous year’s earned income up to a maximum of $26,230 [the amount somebody earning roughly $145,722 could contribute].

“It all comes around to tax planning and having a financial plan drawn up so you understand where those contributions are best put, whether it’s in a spousal RRSP or whether it’s a combination,” says Daniel Nolan, an investment advisor with IPC Securities Corp. in Ottawa.

Ms. Robb adds, “I don’t think people realize that [with] the spousal RRSP, when you contribute, you actually take the income through your contribution room [to] put into your spouse’s RRSP. But then that money is no longer yours. It’s in their name. It grows for them. When they take it out, they get taxed at their income-tax rate.”

There is an important caveat, however, which is meant to encourage couples to use the spousal RRSP for their long-term tax benefit.

Canada’s Income Tax Act contains an attribution rule, which states that if funds are withdrawn from a spousal RRSP in the same year as the contribution was made, or in any of the next two full taxation/calendar years, withdrawn funds up to the contribution amount will be taxed in the hands of the contributor, at their presumably higher rate.

“The major long-term benefit is that a spousal RRSP is one of the last permitted ways under the tax rules to shift investment savings from a higher-income spouse to a lower-income spouse to set a couple up for future income splitting, with the ideal goal of equalizing incomes during retirement,” says Graeme Egan, head of CastleBay Wealth Management Inc., a portfolio manager and fee-only financial planning company in Vancouver.

If the family situation changes – for example if the lower-income spouse wants to return to work - the spousal RRSP is still feasible.

“When circumstances change, there will be more tax planning involved to determine the best course of action for the couple going forward, like how much to contribute to each individual or spousal RRSP in the future since the lower-income spouse will now have their own income and their own RRSP room,” Ms. Robb says.

There are other factors that may need to be taken into account for precision planning in order to best equalize taxable income in future. For example, one spouse may have earned a pension that will factor into their retirement income. Or perhaps one spouse could come into a sizable inheritance. The percentage of savings held in the spousal RRSP can be adjusted to adapt to such circumstances.

Spousal RRSPs can also be beneficial well past the normal retirement age.

Individuals must stop contributing to an RRSP by Dec. 31 of the year they turn 71, at which time they essentially have two choices – to convert their RRSP to a registered retirement income fund (RRIF) or to a fixed-income annuity. But some people continue working past the age of 71, and the spousal RRSP might be an excellent family strategy.

“If you love your job and you work past the age of 71, and you have RRSP contribution space, and your spouse is under 71, you can still contribute to your spousal RRSP and get that deduction,” Mr. Kingston says.

Mr. Ghani notes that as an accounting practitioner with his own firm, he may well decide to continue working past age 71, in which case the spousal RRSP will still be a viable strategy. “Sana’s younger than I am, so it will give me the opportunity if I have earned income to continue contributing to her RRSP much later in life,” he says.

Mr. Ghani says he may well decide to continue working past age 71, in which case the spousal RRSP will still be a viable strategy. His wife Sana is younger than he is, so he could continue to contribute to her spousal RRSP.Moe Doiron