Spousal RRSP’s & Income Splitting
Spousal RRSP’s allow income splitting with propert planning. If your spouse makes less than you now, you can contribute to their RRSP to ensure you both have the same inome at retirement. This means that during retirement, both spouses will have the same income and will be in similar tax brackets.
Limits To Spousal RRSP Contributions
The amount you contribute to your spouses RRSP is subject to your own RRSP deduction limit. That is to say the total combined contributions to your own RRSP and your spouses RRSP cannot exceed your own RRSP deduction limit.
Is The Spousal RRSP Dead Because of Pension Splitting?
No. Pension splitting is generally only available if you are over the age of 65 (with a few exceptions). If you plan on retiring before age 65, then the spousal RRSP still gives you the flexibility to split income in early retirement.
What Prevents Me from Contributing to a Spousal RRSP and The have My Spouse Withdraw the Funds?
The Income Tax Act has provisions to prevent abuse of spousal RRSP’s. If you made contributions to your spouses RRSP and your spouse withdraws funds from the RRSP, then you will be required to include in your income the lesser of:
- The amount you contributed in the past three tax years, or
- The amount withdrawn.
You contribute the following amounts to your spouses RRSP:
2007 – $2,500
2006 – $5,000
2005 – $2,000
2004 – $2,000
If in 2007 your spouse withdraws $6,000, you must include $6,000 in your income.
If in 2007 your spouse withdraws the entire $11,500, then only the amounts you contributed in the last three years is included in your income or $9,500 (the contributions in 2007, 2006, and 2005).