How to use a Spousal RRSPclento
Written by Camillo Lento
A spousal RRSP is defined by the Canada Revenue Agency (CRA) as: “An RRSP that you establish to pay yourself income at maturity, but that your spouse or common-law partner contributes to”.
Note that the CRA’s definition of a spouse includes common-law spouses (both opposite-sex and same-sex couples). Essentially, a spousal RRSP allows you to make a contribution into your spouse’s RRSP whereby you receive the RRSP deduction for the contribution while your spouse pays the tax on the future withdrawal. Therefore, the spousal RRSP can be used to effectively and legally split income between spouses.
The spousal RRSP is most effective for couples that have significantly different marginal tax rates. In this situation, the spouse with the larger marginal tax rate makes the contribution to the spousal RRSP of the lower tax rate individual to effectively reduce their current tax bill. A numerical example will highlight the tax savings. Consider the married couple of Brandon and Mikayla who earn an annual salary of $60,000 and $10,000, respectively and have marginal tax rates of 31.2% and 7.7%, respectively. Brandon and Mikayla are expected to have the similar marginal tax rates in the future. Assume that Brandon would like to make a $5,000 contribution into an RRSP that will be invested in a 10-year GIC earning 3% per annum.
Table 1 presents the taxes payable under a personal and spousal RRSP.
Table 1 – Taxes Payable from a Personal versus Spousal RRSP Personal Spousal RRSP RRSP Brandon’s Contribution $5,000 $5,000 Brandon’s Marginal Tax Rate 31.20% Brandon’s Tax Refund $1,560 $1,560 Return on investment $1,720 $1,720 Withdrawal Amount $6,720 $6,720 Marginal Tax Rate 31.20% <-Brandon 7.70% <-Mikayla Taxes Payable $2,097 <-Brandon $517 <-Mikayla Spousal RRSP Tax Savings $1,580
In regards to the contribution, Brandon will receive the same tax benefit under both the personal and spousal RRSP options. However, under a personal RRSP, Brandon pays the tax on RRSP withdrawal at his higher marginal tax rate of 31.2%, resulting in a tax bill of $2,097. Whereas, under the spousal RRSP, the taxes on withdrawal are paid by Mikayla at her lower marginal tax rate of 7.7%, resulting in a tax bill of only $517. Therefore, the spousal RRSP has successfully (and legally) shifted income from the higher tax spouse to the lower income spouse to reduce the family’s tax bill by $1,580.