One of the most underused tax strategies in Canada

Simplifying Tax Newsletter - Edition 1.5

This may surprise you - but the Spousal Registered Retirement Savings Plan is one of the most underused tax strategies in Canada. This may be due to a lack of awareness and the perceived complexity of the attribution rules . While the spousal RRSP offers significant tax benefits through income splitting, many Canadians are unaware of how it works or fail to take advantage of it. The key reasons for its underutilization include:

1. Lack of knowledge: There is a general lack of understanding about spousal RRSPs, their benefits, and the specific rules around contributions and withdrawals. Many individuals are simply unaware of this strategy.

2. Complexity of attribution rules: The three-year attribution rule, which dictates when spousal RRSP withdrawals are taxed in the contributor's hands, adds complexity and deters some from using this strategy. Proper planning is required to avoid attribution.

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3. Perceived as only for high-income earners: Some may view spousal RRSPs as only beneficial for couples with a large income disparity, failing to recognize the advantages for moderate income gaps as well.

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4. Preference for pension income splitting: The introduction of pension income splitting rules in 2007 may have reduced the perceived need for spousal RRSPs, although they still offer greater flexibility for income splitting.

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5. Lack of professional advice: Without guidance from financial advisors or tax professionals, many individuals may overlook the potential benefits of a spousal RRSP strategy.

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The Top 5 tax benefits of a spousal Registered Retirement Savings Plan (RRSP):

1. Income splitting in retirement: The main advantage is the ability to split retirement income between spouses, potentially lowering the overall tax burden by withdrawing funds from the lower-income spouse's RRSP. This allows couples to take advantage of lower marginal tax rates.

2. Tax deduction for the higher-income spouse: Contributions to a spousal RRSP are deducted from the higher-income spouse's taxable income, providing an immediate tax savings.

3. Delaying withdrawals: If the annuitant (spouse who will withdraw) is younger, withdrawals from the spousal RRSP can be delayed until after age 71, allowing for longer tax-deferred growth.

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4. Unused contribution room at death: The deceased's legal representative can contribute to the surviving spouse's RRSP using the deceased's unused contribution room, reducing the final tax bill.

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5. Access to government programs: Funds can be withdrawn from a spousal RRSP under the Home Buyers' Plan (up to $70,000 for a couple) or Lifelong Learning Plan without triggering the attribution rules.

Despite being an underutilized strategy, a spousal RRSP can provide significant tax savings through income splitting, especially for couples with disparate incomes or those seeking to maximize retirement cash flow.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.