Spousal RRSPs

Few couples enjoy full income parity, and that's the beauty of what the Canada Revenue Agency (CRA) used to call the spousal RRSP-recently rebranded as the spousal or common-law partner RRSP.

The tax deferred savings vehicle allows a higher-income earner to contribute to the RRSP of a lower-income-earning spouse, and then deduct the amount of that deposit from his or her earned income.

The objective of this favourable tax treatment is to level out the retirement income of each partner within the couple, and ensure that when the RRSP is converted to a registered retirement income fund (RRIF) that the lower-income spouse withdraws funds at their lower tax rate.

Plus, it provides a way to ensure the couple's retirement is funded by more than one source. Were the funds drawn solely from a high-earning spouse's income (via registered plans or unregistered investments), the tax consequences would be significantly higher.

Contribution rules

Like a regular RRSP, contribution room is set by income level. Taxpayers can contribute the lesser of the annual limit ($26,230 in 2018) or 18% of their income from all sources. To make things easy, the CRA places your annual contribution room, and that of your spouse, in a designated box on the notice of assessment that’s sent to all Canadian taxpayers after CRA processes their returns.

What the program does most effectively is allow a higher-earning spouse to bring a lower-earning partner's contribution up to his or her annual limit if he or she can't afford to do so. Since lower earners have a tendency to have trouble saving, the spousal RRSP option can create huge advantages for those with options to split income.

Some savers opt to tap into their RRSPs to fund first homes and higher education, and the CRA lets spousal RRSP account holders do so without penalty.

There are, though, restrictions for account holders who try to use spousal RRSP funds for other purposes. For example, if your spouse withdraws from his or her RRSP within three calendar years of your making a deposit, you’ll wind up having that sum added to your income for that year.

In tax law terminology, such a withdrawal violates the rules of attribution

Note, the CRA applies the calendar year to this requirement; so, it's different from its tax-year application for RRSP contributions, which allows deposits during the first 60 days of a calendar year. As such, it can be confusing for RRSP account owners.

Late life contribution options

While people over age 71 can't contribute to their own RRSPs anymore, they can contribute to a spouse's if he or she is younger than 71. Further, although it's not legal to contribute to a person's RRSP after they die, the deceased's legal representative can make a final-year contribution to the spouse's RRSP and claim it on the final tax return.

Much like a conventional RRSP contribution, these funds can be placed in the plan during the first 60 days of the following year.

The advantage here is the tax deferral on investment income earned by that younger spouse. But if you really want to take advantage of time and compounding, start early.

Couples who sit down and draw up life plans that include projecting income levels at various stages such as buying a home, child rearing, and eldercare will have more numerous, and more tax-efficient, opportunities for income splitting.