Q. My husband and I are both retired. He still has income from his business, and I have cashed in all of my RRSPs but one. My question is: Can Hubby cash one of his RRSPs (and pay taxes, of course), but then turn around and buy a spousal RRSP for me? Would that be worth doing? Then I could cash this spousal RRSP the following year.
A. Registered Retirement Savings Plan (RRSP) contributions are tax-deductible and withdrawals are taxable. The right mix of contributions and withdrawals—and timing them both—are key.
If your husband takes an RRSP withdrawal of, say, $10,000, and then contributes $10,000 back to an RRSP, Cindy, there’s no net impact on his taxes. He’ll have $10,000 more income, and a $10,000 deduction to reduce that income. He doesn’t need to deduct the RRSP contribution in the year he contributes; a taxpayer can contribute, and then save the deduction for that contribution for a future yea. But in your example, it sounds as though he would contribute and deduct that RRSP contribution in the same year. The only reason for a taxpayer to defer a deduction would be if they expected their income, and the tax savings, to be more in a future year.
If your goal is to get more money into your name by having your husband use a spousal RRSP, Cindy, it’s important to understand how a spousal RRSP works. A spousal RRSP is an account that your husband can contribute to, while you, the other spouse, own the account. Your husband gets to deduct the contribution on his tax return, and you pay the tax on the withdrawals, ideally at a lower rate than your husband would pay.
However, there is an exception that may foil your plan: If your husband contributes to a spousal RRSP this year, and you take a withdrawal from a spousal RRSP this year, or in any of the two subsequent years, that withdrawal is attributed back to your husband. What that means is the withdrawal gets added to his income, instead of included in your income, which defeats your goal.
There are exceptions to these spousal RRSP attribution rules like if you and your husband separated, you became non-residents, or he died, which obviously don’t apply here.
If your goal is to get income from your husband’s tax return onto yours—also known as income splitting—there may be other ways to do it. Or it may not be worth doing at all.
You mentioned he has a business. If you work for him, he can pay you a reasonable salary, at a rate that he would otherwise pay a third party for the same work you’re doing. This would give him a tax deduction, and you would have more income, taxed at your lower rate.
If you’re over 60, you could apply for your Canada Pension Plan (CPP) retirement pension, if you haven’t already. You and your husband can even apply to share your CPP pensions, if you haven’t already, which could be advantageous if his pension is higher than yours. You need to complete an Application for Canada Pension Plan Pension Sharing of Retirement Pension(s) to do so.
Pension sharing allows you to split your CPP pensions earned during the years you have lived together, so that the higher income spouse allocates some of their CPP pension to the lower income spouse. You can even apply to do so after your pensions have started if you didn’t do so initially.
(You can also apply for your Old Age Security (OAS) pension if you’re over 65; however, there is no OAS sharing mechanism like there is with CPP.)
There’s yet another option if your husband is over the age of 65. If he converts his RRSP to a Registered Retirement Income Fund (RRIF), he can move up to 50% of his RRIF withdrawals to your tax return on your tax filings. This is called pension income splitting. But the strategy may not be beneficial this year if he is still running a business part-time and doesn’t want to add even 50% of the RRIF withdrawal on his tax return.
I think another consideration here is if it’s even worth trying to move income from your husband to you. I’ll give a couple of examples. If you have no income, and he has $40,000 of income, moving $10,000 from him to you may have no impact in the province of Alberta. This is because the tax he’d save from having $30,000 instead of $40,000 of income would be the same as the tax credit he’d lose from your income rising from $0 to $10,000 (reduction in his spouse or common-law partner amount claim).
The same zero net benefit situation may apply if your income, Cindy, was $15,000, and your husband’s income was $30,000 if you lived in Prince Edward Island. Your tax rates would be the same.
The point is, tax rates may be such that moving income from one tax return to the other isn’t worth it anyway. There are ways to reallocate income amongst spouses, but spousal RRSPs aren’t a short-term solution that you can implement in the same year.
Long-term planning with spousal RRSPs, CPP pension sharing, and RRIF income splitting can help minimize family tax and maximize your retirement.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
MORE BY JASON HEATH:
- The ins and outs of tax and estate planning for a RRIF
- Can I have a multi-generational RESP?
- How to avoid a pension clawback from a one-time event
- The best way to transfer investments to your spouse