A Different Perspective On Spousal RRSPs

During this tax season there have been lots of tax-savings suggestions to be found in the various financial magazines, Canadian MoneySaver included. One of these tax-savings tips being put forth is that of contributing to your spousal RRSP. This is especially useful if one of the individuals has much higher income and consequently a larger dollar amount in their RRSP. By contributing to the other person’s RRSP, you achieve an income splitting at a future point in time. Hopefully when the funds are withdrawn from the RRSP, the dollar amounts will be closer to an equal amount, but more importantly fall into the same lowest possibe tax bracket.

Now lots of advisors are promoting this technique, however I do not believe they are giving full disclosure! This is only a tax savings manoeuvre if everything remains exactly the same! That is, that the higher wage earner always remains the high wage earner between the two people. Advisors need to ask their clients if the wage-earning potential is going to remain the same all the way into the retirement future. Sure, presently the stay-at-home parent is the low wage earner, but are they always going to remain the lower earner between the two individuals?

What happens if down the road the positions are reversed? The low wage earner now becomes the high wage earner and ultimately ends up with their own RRSP. Their own RRSP could have the potential to become larger than their partner’s RRSP in part because of these extra spousal contributions.

Another aspect is to take a close look at is the age of each partner. The timing of when you access these RRSP funds will likely be based upon the age of the participant. If the current high wager earner is, say, ten years older than the spouse, then you have effectively delayed accessing these funds by ten years, assuming the withdrawals start at the usual 65 years of age. In addition, what is happening with the participants during this ten-year gap? Is the younger person still working? If so there is a good chance the working individual is in a higher tax bracket than the other (retired) person. You won’t want to access this Spousal RRSP while you are in a higher tax bracket, so you must delay until the younger person goes into retirement. In addition, you must be aware of the three-year contribution delay. Withdrawals from Spousal RRSPs cannot begin before three clear years from the last contribution. So the individuals must factor this three-year delay into their plans.

I think advisors are doing a disservice to their clients by focusing way too much on the present day situation of an immediate tax saving versus considering what the future tax implications will be. The advisors and their clients must try and visualize what the future situation will look like. They must work through the above-mentioned situations to help them determine if this Spousal RRSP contribution is truly the best route for them to take.

Dean Neald, CPA, CMA, resides in Regina, Saskatchewan.