By Rob Cosman, Partner, Jones & Cosman Chartered Professional Accountants
If you contribute to your spouse’s or common-law partner’s registered retirement savings plan, or if your spouse or common-law partner contributes to your RRSP, that investment can be referred to as a spousal RRSP. Additionally, if your spouse or common-law partner converts the funds in the RRSP to an registered retirement income fund, that is considered to be a spousal RRIF. Understand the tax implications and rules around contributing to or taking withdrawals from spousal accounts.
RRSPs vs. RRIFs
Both RRSPs and RRIFs are investment vehicles that can be made of a range of stocks or other types of investments. You may contribute money to an RRSP, but if you make withdrawals, you face income taxes and penalties. Conversely, with RRIFS, you cannot make contributions, and you are required to take out a minimum amount of money every year based on your age and the amount of funds in the account.
Under Canadian law, you must convert RRSPs to RRIFs by the last day of the year you turn 71, but you may convert your RRSP to an RRIF prior to this time. If you have a spousal RRSP, it converts to a spousal RRIF.
Contributing to Spousal RRSPs
You may contribute to your own RRSP as well as to your spouse’s RRSP, but your total contributions cannot exceed your annual deduction limit. This amount appears in the notice of assessment you receive from the Canada Revenue Agency every year. For example, if your annual contribution limit is $5,000 and you contribute $2,000 to your own RRSP, you may only contribute $3,000 to your spouse’s RRSP.
Whether you contribute to your own account or a spousal RRSP, the money you contribute is not taxable, and you may claim a deduction equal to the amount of your contribution. However, once you convert the RRSP to an RRIF, you may no longer make contributions to the account.
You can no longer make contributions to your spouse’s RRSP after your spouse’s death. However, your spouse’s legal representative may make contributions to your RRSP on your spouse’s behalf during the year of your spouse’s death or in the first 60 days of the following year. Your spouse’s legal representative may also claim the full contribution limit on your spouse’s final tax return. If you inherit your spouse’s RRSP or RRIF, you may deposit the amounts to your RRSP or RRIF.
Withdrawing From Spousal RRSPs and RRIFs
If you have contributed to your spouse’s RRSP, your spouse’s withdrawals can have a direct impact on your tax liability due to the three-year attribution rule. Under this rule, if you make a deposit to your spouse’s RRSP, he is not allowed to withdraw those funds for at least three years. Similarly, if you contribute to your spouse’s RRSP and your spouse converts that account to an RRIF, your spouse may not exceed the annual minimum RRIF withdrawal limit for the three years after your contribution.
To explain, imagine you contribute $5,000 to your spouse’s RRSP in 2014. Two years later in 2016, your spouse withdraws $4,000 from his RRSP. In this case, because three years has not passed, the $4,000 is considered to be money you deposited, and you must declare the funds as income on your tax return.
To illustrate a similar situation with RRIF withdrawals, imagine you contribute $5,000 to your spouse’s RRSP in 2015, and in the following year, your spouse converts the account to an RRIF. The total value of the RRIF is $100,000, and as your spouse is 71, he must withdraw a minimum of 5.28 percent of the funds or $5,280. If he withdraws more than this amount, you may have to report some of the withdrawal as income.
In these situations, you may have to account for income tax that was with deducted when by the RRSP or RRIF administrator as well as other factors. To calculate the amount of income you should report, use Form T2205 (Amounts from a Spousal or Common-Law Partner RRSP, RRIF or SPP to Include in Income).
Pension Income Splitting
One of the reasons to use spousal RRSPs or RRIFs is to offset tax liability. For example, if you make significantly more money than your spouse, contributing to his RRSP can help lower your income on paper and reduce your tax liability. At the same time, you are helping your spouse save for retirement, and upon retirement, your spouse will have income from his RRSP while you have income from yours. That can help to keep both of you in a relatively low tax bracket. Conversely, if you were the only one to reap the benefits of a pension plan, your payments may put you into a higher tax bracket, thus increasing your tax burden.
About Rob Cosman
Rob Cosman, is a Chartered Professional Accountant who runs his own accounting and tax practice with his wife in Toronto, Ontario. Beginning in 2000, Rob’s career spanned over Halifax, Cayman Islands and Toronto. Rob held senior industry positions including CFO roles in public and private industries ranging from telecommunications, retail sales, and consumer packaged goods.
Rob has over 10 years of tax experience and is the author of numerous articles. He has the ability to take complex tax situations, explain them in common sense terms and guide clients to make the best decisions based on their individual situations.