The Spousal RRSP Demystified

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The Mystical Spousal RRSP

Most people have heard about it. Some think they need it. Few actually understand it. That is the Spousal RRSP. It’s one of the most common questions I get every year during tax season. I’ve noticed that various financial institutions understand the general concept of what it is, but lack insight into the finer details. And of course the devil is always in the details.

As a quick reminder, in order to claim an RRSP deduction for the 2013 tax year, contributions have to be made by March 3, 2014 (typically this date is March 1 of the following calendar year, however in 2014 March 1st falls on a Saturday, so Canadians have until the next business day to make their contribution and deduct it on their 2013 income tax return).

So, back to this Spousal RRSP thing.

What is it? Quite simply, a Spousal RRSP is where you make an RRSP contribution but your spouse becomes the owner of the account.

I’m a nice personal and all, but why would I want to give my spouse my RRSP Contribution? Isn’t my spouse already entitled to 1/2 of my assets anyways? Well, in certain circumstances, it provides a mechanism to split income with your spouse during retirement and not ruffle the feathers of the good folks over at CRA (I’ve put the word “good” in just in case they are reading this!).

Why would I want to split income during retirement you ask? Great question. If you and your spouse are expecting to have significantly different incomes during retirement, the spouse with the higher income will pay lots of tax and the spouse with the lower income will pay very little. Because we have a progressive tax system in Canada (the more you make, the higher the rate of tax), you’re combined tax bill will be lower the closer your incomes are to each other. A Spousal RRSP can help you accomplish this through income splitting.

Canada already has a huge national debt- why would I want to reduce the amount of income tax I pay in retirement and further contribute to this national debt? You know what- you’re right. You probably feel like you’ve paid so little in taxes throughout your working life, its time to pay more tax in retirement. If that is you, no need to read any further (and as a fellow taxpayer, thank you). If not, read on.

How does a Spousal RRSP work?

It’s actually quite simple:

  • During your working years, the spouse with the higher income will make contributions to a Spousal RRSP. The higher income spouse gets to deduct the contribution to the Spousal RRSP on their income tax return. As for how much the higher income spouse can contribute- that is based on his/her income and is the same amount that they can contribute to their own RRSP if they chose to do so. You can see the current year contribution amount on your most recent Notice of Assessment from the CRA.
  • When the higher income spouse deducts the Spousal RRSP contribution from their income, that will reduce the amount of income taxes payable in the year of the deduction.
  • Once a contribution is made to the Spousal RRSP, your spouse is now the annuitant on the account (in other words, they are entitled to the assets of the account while they are alive).
  • When amounts are withdrawn from the Spousal RRSP account (typically during retirement), they become taxable. But since it is withdrawn by the lower income spouse, it is taxed in their hands, ideally at a lower rate of tax.

Could you provide an example? Sure:

Lets say in 2010, John, who is 62 and the higher income spouse, makes a Spousal RRSP contribution of $20,000 into Jane’s RRSP account. John is in the highest tax bracket and is subject to a tax rate of 40%. Jane, also 62, is the lower income spouse and is subject to a rate of tax of 15%. For this example, assume that these tax rates remain consistent before and after retirement.

In 2010, John is able to deduct the contribution from his personal income tax return. It will reduce his tax bill that year by $8,000 ($20,000 x 40% tax rate = $8,000).

Fast forward to 2013. The Spousal RRSP contribution made in 2010 has earned a 5% annual return, so is now worth a little over $23,000. John and Jane are now retired. Jane makes a $23,000 withdrawal from her RRSP account (which was funded by the $20K contribution made by John in 2010 and has earned investment returns totaling $3K since then). Jane will be taxed on the entire $23,000 withdrawal in 2013. The taxes that will be paid on the withdrawal will be $3,450 ($23,000 x 15% tax rate).

Now suppose that John instead made the contribution in 2010 to his own RRSP. In 2010 his tax bill would still be reduced by $8,000. If in 2013 he made the same $23,000 withdrawal, but from his own RRSP account, he would pay $9,200 in taxes ($23,000 x 40%).

So to recap: If John makes an RRSP contribution to his own account in 2010, he would pay $9,200 in taxes to withdraw it in 2013. If he made the same contribution in 2010 but to a Spousal RRSP in Jane’s name, the tax bill would be $3,450, or $5,750 less than if John withdrew the amount. As you can see, big savings!

Perfect. I’m all set to make my Spousal RRSP contribution by March 3, 2014. There is nothing more I need to know, right?

Depends who you ask. Make sure you’re speaking to an expert. Two things you need to know:

  • Jane cannot start making withdrawals from her Spousal RRSP account until two calendar years after John made the last contribution. Otherwise, the withdrawals will be taxed as if they were John’s withdrawals (and help with that national debt problem referred to above).
  • As a result of the above point, it is always a good idea that the spouse receiving the Spousal RRSP contributions (Jane) set up two RRSP accounts- one that is dedicated to receiving the Spousal RRSP contributions (from John) and one that is dedicated to that spouse’s own RRSP contributions (Jane’s contributions to her own RRSP). This way if funds are needed prior to the passing of the two calendar years, a withdrawal can be made from Jane’s own RRSP account without tainting the Spousal RRSP account.

Further information can be found on CRA’s website by clicking here or calling them at 1-800-959-8281. Or, if you actually want help, you can call or email me.

Do You Have a Tax Efficient Portfolio?

tax efficient portfolio, tax strategy, investment tax strategy, tax efficient, tax efficiency, how to make good tax investmentsThere is good news and there is bad news. Bad news first. The bad news is, regardless of what you do with your investments, the taxman will somehow get their money. The good news is, there are ways to structure your investments so that the amount of money going to the taxman is minimized. Not all investment income is taxed in the same way, so spending some time on building a tax efficient portfolio can help minimize the total tax you will pay on your investment income.

Before you can build your tax efficient portfolio, some background information. Generally, there are three types of investment income that you can earn:

1. Interest income (for example, high interest savings accounts, government bonds, corporate bonds, etc.)

2. Capital gains (for example, when you sell an investment, you could have a capital gain or loss on the sale)

3. Dividend income (for example, if you hold shares of Canadian corporations such as Bell Canada, you may receive a quarterly dividend)

It is important to understand how each type of investment is taxed. For purposes of this analysis, I have assumed that the taxpayer is in the second highest tax bracket in Ontario (income between $135,000 and $509,000). For 2013, the following tax rates would apply to investment income held outside of an RRSP/TFSA/RESP:

Interest Income- 46.41%

Capital Gains- 23.20%

Dividend Income- 29.54%

You can see that the above rates vary significantly depending on what type of investment income you have. Interest income of $100 would attract $46.41 in taxes compared to only $29.40 if you had $100 in dividend income. That’s a big difference! By structuring your investments in the right way, you may be able to avoid paying tax on all your interest income and defer paying tax on your other investment income. Sounds like a great idea, right? Lets discuss.

Once you’ve selected the investments you want to buy (or you may already own them), you need to decide what type of account to put them in. Generally your options are as follows:

  • RRSP, TFSA and/or RESP (Registered Accounts)
  • Non-Registered (although this doesn’t have a cool acronym like the others, simply put this is a catch all for anything other than the above).

An RRSP account allows all investment income to accumulate on a tax deferred basis (in addition to an immediate tax deduction). That tax deferral can add up over time thanks to a wonderful thing called compounding! For example, a $100,000 investment inside an RRSP earning 5% per year would be worth $339,000 after 25 years thanks to compounding.  If you had to pay tax on the investment income every year (based on the 46.41% rate above), that same investment earning the same 5% return would only be worth $195,000 after 25 years. Big difference, ehh! Now after 25 years when you withdraw the money from your RRSP you will have to pay tax at that time, but hopefully you you be in a lower tax bracket at that time.

A TFSA account does not attract any tax at all just as its name suggests, regardless of what kind of investment income you earn.

An RESP allows investments to grow on a tax deferred basis. When withdrawn, income is taxed in the hands of the child, usually at a much lower rate and often times will not attract any tax. Additionally, you can get the added bonus of up to $500 annually thanks to the Canadian Education Savings Grant program (lifetime maximum of $7,200 per child).

Non-registered accounts do not receive any special tax treatment. The rates outlined above apply to investment income earned in non-registered accounts.

The Tax Efficient Portfolio

Now that you have an understanding of the tax rates applicable to the various types of investment income and the different ways you can hold your investments, lets talk strategy.

Investments that generate interest income should be held first in your TFSA then in your RRSP/RESP once you’ve used up your TFSA contribution room. Interest income attracts the highest rate of income tax, however if you hold it in your TFSA, your tax bill disappears! If you hold them in your RRSP, while you will ultimately be taxed when you withdraw from your RRSP, you will benefit from tax-deferred compounding.

Investments that generate dividend income from Canadian corporations should first be held in a non-registered account. Because of something called the “Dividend Tax Credit”, an individual with no other sources of income could receive almost $50,000 of eligible dividend income TAX FREE. This dividend tax credit still applies if you have other sources of income, however it results in a reduced tax rate on your dividend income as you’ll note above (29.54% compared to 46.41%). If you’ve got room left in your TFSA/RRSP/RESP after allocating all your interest earning investments to these accounts, then you should put balance of dividend earning investments there.

Investments that generate capital gains (or losses) should be held in either your non-registered account to take advantage of the lower tax rate on capital gains, then your TFSA if you have any room left. You can also put them into your RRSP if you have contribution room left over. A word of caution though- for ‘higher-risk’ investments that could generate a capital loss just as easily as they could generate a capital gain. If you hold these investments in your TFSA or RRSP, you lose the benefit of offsetting capital gains with these losses that you would have otherwise been able to do in your non-registered account. Therefore, it almost always makes sense to keep these ‘higher-risk’ non-blue chip type stocks in your non-registered account.

As you can see, the general idea is that investments which attract higher rates of tax (eg. interest income) are better put into accounts that either eliminate (TFSA) or defer (RRSP/RESP) the tax on that income. By using this general strategy, you can reduce your tax bill from your investments and let your two best friends go to work for you: time and compounding.

Other Considerations:

Here are some other, though not as common, situations that are still worth mentioning:

  • Dividends from US corporations are best held in your RRSP. These dividends do not get the benefit of the Dividend Tax Credit that dividends from Canadian corporations do. Additionally, if not held in your RRSP, there is an automatic 15% withholding tax that gets withheld by the US corporation paying the dividend. If held in your RRSP, there is no withholding tax. If held in your non-registered account, you can often recover some or all of the withholding tax through a withholding tax credit. If held in your TFSA, you can’t recover the withholding tax. 
  • Other Foreign Dividends from a country that does NOT deduct withholding tax when held in your RRSP. If taxes are withheld regardless of what account they are held in, your non-registered account is the way to go as you can claim some or all of the withholding tax back through a withholding tax credit. If held in your TFSA, you can’t recover the withholding tax.
  • If you borrow money to invest (other than for short-term purposes of making an RRSP contribution for example), make sure you hold the investments in a non-registered account as you can deduct the interest from the investment income earned. If held in your RRSP/TFSA/RESP, you are not able to deduct the interest that you pay.

While it is difficult to control and have certainty around your investment returns, with some prudent planning you can build a tax efficient portfolio to maximize your after-tax investment returns.

If you would like to discuss how to build a tax efficient portfolio as outlined above, or any other tax strategies, please do not hesitate to contact us or 905-334-6674.


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Sounds silly doesn’t it? Why on earth would getting an income tax refund be bad? Well let me tell you why! The only reason you are getting an income tax refund is because you OVERPAID on your taxes throughout the year. Or, put differently, you provided the government with an interest free loan! As a fellow taxpayer, I very much appreciate your nice gesture. In times like these when we have large government deficits every little bit helps after all.

The fact remains though, that if you are getting an income tax refund, you’ve lent your hard earned money to the government, interest free, for as many as 15 months. The reason is this:

Your employer is required to deduct payroll taxes from every pay cheque according to government rules. But what if every year you make a large RRSP contribution reducing the total amount of tax you will owe. Well you don’t get that refund until you file your income tax return.

What if I told you that there is a way to get your income tax refund instantly and not have to wait up to 15 months for it. In many situations, you can apply to Canada Revenue Agency to have your employer reduce the amount of tax they are required to deduct from your pay cheque.

Lets try out an example. Suppose you make $60,000 from employment in Ontario and get paid every two weeks (gross pay would be $2,307 per pay). Your employer would deduct about $450 per pay for income taxes. Assuming this is your only source of income and you had no other deductions, the amount withheld by your employer will come pretty close to what you actually owe in income taxes when you file your income tax return by April 30 the following year (which will be about $11,800).

However, suppose you make an RRSP contribution through automatic withdrawal from your bank account every pay day equal to 10% of your annual salary or $6,000 per year (which works out to $231 per pay). This $6,000 RRSP contribution would drop your annual income tax bill from approximately $11,800 to about $9,900, or save you $1,900 in taxes. Perfect, just wait to file your income tax return (due April 30th of the following year) and the government will send you your $1,900 a few weeks after you’ve filed your tax return. Remember when you made that first RRSP contribution that helped generate that tax refund? If you do it every pay cheque, the first contribution would have been in March. You don’t get the refund from that contribution until over a year later when you file your tax return.

What if your employer, instead of deducting $450 per pay for income taxes, deducted $375 per pay? That would increase your “take home” pay every two weeks by $75, or about $1,900 annually (that’s funny, wasn’t that the same amount as our income tax refund?). Now when you go to file your taxes, you’re total tax bill for the year will be about $9,900, and your employer would have withheld about $9,900 from your pay cheque, so generally you won’t owe anything or you won’t get a refund (other than maybe small amounts either way). In this case, you got your ‘income tax refund’ through your pay cheque every two weeks. No waiting for your money. No interest free loan to the government.

Assuming you are being a good little taxpayer and will pay your appropriate amount of taxes based on your income, prudent tax planning would say that you will always want to have a net zero income tax return. Some would even argue that owing money to the government for the current year is a way for the government to loan you money interest free (if you owe more than $3,000 though, they will ask you to make installment payments through the year, so I don’t recommend this strategy).

In many cases, this ‘instant refund’ can substantially increase your take home pay. You have to remember though, that the onus is on you to save accordingly because you don’t have that big lump sum income tax refund coming when you file your tax return. You could take the extra pay every two weeks and put it into your credit cards, line of credit, mortgage, car loans, etc. or you could invest it back into your RRSP or TFSA.

If you have one of the following deductions, you may be eligible for reduced income tax withholding from your employer:

  • RRSP Contributions
  • Childcare Expenses
  • Employment Expenses
  • Moving expenses
  • Losses from a Business (Sole Proprietorship) or rental property
  • Charitable Donations

You must prepare form T1213- Request to Reduce Tax Deductions at Source (click here to go to CRA’s website to download the form) and send it to CRA. They will send you a reply after a few weeks advising you whether you were approved or not. If you were, simply provide a copy of the letter to your payroll department and you’re done!

If you have any questions about this or any other income tax issues, don’t hesitate to contact us @ or 905-334-6674.

Contribute To Your RRSP Or Pay Down Debt?

This is by far one of the most common questions that accountants and financial advisers receive around this time of year. There is no right or wrong answer either. The attached article attempts to shine some light on the subject. Have a read.

RRSP vs Debt


Do we really save the way we should? Is making a lump sum contribution to our RRSP in the last few days of February really a good strategy? Don’t answer that.

What if we took our annual contribution and divided it by 12? $800 per month is much more manageable than $9,600 once per year. And don’t forget that we can invest that $800 earlier and have it accumulate tax free that much sooner….

Are you one of the many who waits until the very last minute and contributes to their RRSP in the last few days of February? Break the cycle. Start now. Make investing a regular occurrence. You’ll be amazed how much easier it is to come up with a $10K RRSP contribution by paying it monthly than trying to scramble at the last minute.

Give us a call or send us a message. We’ll help with the details. or 905-334-6674.