The Spousal RRSP & The Double Trap

by Tax Guy - Burlington Accountant on April 2, 2011 Print This Post Print This Post

If you have a spousal RRSP, be aware of the special spousal RRSP rules that may apply when your spouse withdraws from the plan.

If you have withdrawn from a spousal RRSP, you may have experienced the way these rules are applied.

When you consider the tax withheld on the RRSP withdrawal the results can be even more perplexing.

You could end up spending your tax refund on your own tax bill!

Spousal Attribution Rules

If you contribute to a spousal RRSP (i.e. to your spouse’s RRSP) in the current or prior two tax years and your spouse withdraws from the RRSP, you may be responsible for some of the tax.

The amount added to your own income is limited to the contributions you made in the current or prior two years. To find out more about how these rules work, read Withdrawing From A Spousal RRSP.

How The Rules Apply To Your Tax Returns

You contributed to your spouse’s RRSP and your spouse withdrew the funds. Here is what happens:

On Your Spouse’s Tax Return

Since the RRSP belongs to your spouse, the full amount of the withdrawal is added to his or her income on Line 129.

Yes. The full amount of the withdrawal is added.

On Your Tax Return

Since the attribution rules apply, you are also required to put an amount on Line 129 of your tax return.

The amount you report is the lesser of the amount your spouse withdrew or the total of your contributions to the spousal RRSP in the current or prior two tax years.

I know what your thinking. We just added the withdrawal to my spouse’s income and now you’re saying I add it to mine as well?

That’s right but read on…

The Fix

If the situation was left as is, Canadians would be screaming about fairness and double taxation. The good news is that the Income Tax Act fixes this situation.

Your spouse is allowed to take a deduction that is equal to the amount that was attributed to you.

But there is a catch.

The Catch Is…

When your spouse withdrew from his or her RRSP, there was an RRSP withholding tax applied.

This withholding tax can only be claimed as pre-payment of your spouse’s income tax (not yours). The result is that your spouse will get a refund in four to six weeks but you will have a tax bill due April 30th!

Here is an example:

Assume you contributed $50,000 to your spouse’s RRSP last year and this year $10,000 is withdrawn. Your tax rate is 33% and your spouse’s is 22%.

RRSP withdrawal$10,000$0
RRSP Withholding Tax-$2,000$0
Net Proceeds$8,000$0
Taxable Income$10,000$10,000
Attribution Deduction-$10,000
Tax on Marginal Income$0$3,333
RRSP TAX Withheld$2,000$0
Balance Owing (Refund)$2,000-$3,333

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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George Vlastakis March 31, 2011 at 10:55 am

So, is it a fair assumption that so long as you wait at least three years, then there isn’t any attribution back to the contributing spouse?

Tax Guy April 2, 2011 at 10:30 am

Generally. Yes.

Dale April 23, 2011 at 12:43 pm

What is the capital gains tax rate on foreign currency, is it thee same as stocks?

Tax Guy May 10, 2011 at 9:28 pm

Please keep comments on the article topic. There is a search box in the right column.

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