splitting is a tax planning strategy in which various techniques
are used to minimize income taxes by establishing the same
taxable income for each spouse or other members of a family
of assets for tax purposed determines the tax burden on investment
income during retirement. There are numerous opportunities
to achieve income splitting between spouses during retirement,
which can minimize your overall tax burden. Some of the more
common income-splitting techniques include:
Federal pension income
►††† Contributing to a spousal RRSP
►††† Accumulating equal amounts of non-registered savings
►††† Splitting of Canada Pension Plan credits - "Pension Sharing"
►††† Joint ownership of a residence of ownership by the "lower income"
►††† Saving and investing of the "lower income" spouse
►††† Properly investing an inheritance
is a closer look at but one strategy:
Lower Future Taxes by Contributing to a Spousal
Canadian couples are not aware of the advantages of spousal
RRSPs, and are missing out on one of the few income splitting
techniques that can lower their future tax bills.
The Same Tax Deduction for You
annual RRSP contributions can be made to a spousal plan, your
personal RRSP, or to a combination of both. Regardless of
where you direct your contribution, the total of all your
contributions must not exceed your annual contribution limit.
When you contribute to a spousal plan, you receive the tax
deduction, while your spouse has ownership of the plan and
is entitled to control and keep the assets. Any contributions
you make do not affect your spouseís personal RRSP contribution
limit. In retirement, your spouse will receive an income from
the proceeds, paying tax on that income at a presumably lower
Save Future Taxes Through Income Splitting
using a spousal RRSP, youíre essentially shifting retirement
income from one spouse to the other in an attempt to equalize
retirement incomes and avoid having one spouse in the highest
tax bracket. By spreading future taxable income between spouses,
your overall tax bill may be reduced.
take a look at an example: A retired couple receiving $50,000
of retirement income from one spouseís registered plan would
pay approximately $10,060 in taxes, leaving the couple with
an after-tax income of $39,940. If the RRSP money had been
split between them through a spousal RRSP, $25,000 would be
taxable to each spouse at a lower marginal tax rate. In this
situation, the total family tax bill would be $4,200, leaving
them with an extra $5,860 in their pocket or 14% more after-tax
income per year.
Two Scenarios in which $70,000 annual
retirement income is received
from Registered Plan
from Spousal Plan
Beyond Age 71
have until the end of the year in which you turn 71 to make
your final RRSP contribution. However, if you continue to
have earned income or have unused contribution room past this
age, and if your spouse is younger than 71, you can continue
making spousal RRSP contributions and receive the resulting
Maximize Your Government Benefits
equalizing retirement incomes, you may help to reduce the
Old Age Security (OAS) clawback and the age tax credit
at age 65, if your spouse does not have any other pension
income, he/she could open a RRIF with funds in the spousal
RRSP and, by receiving at least $2,000 each year from the RRIF,
can access and claim the $2,000 federal pension income tax
Tax Rules for Withdrawals
RRSPs can be a great tool for retirement planning, but there
are specific rules governing them that pertain to withdrawals.
Any withdrawals made by your spouse will be taxable in your
hands if you made contributions to any plan in the year of
withdrawal or the two previous years. Revenue Canada doesnít distinguish between spousal contributions
past their attribution deadlines and those that are still
in the two-calendar year waiting period. You have to wait
two full calendar years after the last contribution was made
this rule exists to prevent investors from using spousal RRSPs
as a short-term method of lowering their combined tax bill.
certain circumstances, these attribution rules do not apply,
such as death or living separate due to marital breakdown.
In these instances any amounts from a spousal RRSP are taxable
to the annuitant and not the contributing spouse. Also, once
the plan has matured into a registered retirement income fund
(RRIF), no attribution rules apply if only the annual minimum
RRSPs have many advantages and can be a powerful long-term
tax planning tool. Talk to your investment adviser about how
you and your spouse can save future taxes with a spousal RRSP.
contained in this commentary is designed to provide you with
general information only, and is not intended to be comprehensive
advice applicable to the circumstances of any individual. We
strongly urge you to seek professional assistance before acting
upon information included herein.