Tax hacks. Fall in love with these income sharing tips for you and your spouse
Would you like to make the most of your retirement savings with your married or common law spouse? The trick here is not knowing to save, but know How to save.
The right account can help you and your spouse maximize tax savings and potentially earn higher combined after-tax income after you stop working. Remember, we’re only going to cover the basics here … but if you need help, our financial advisors are just a phone call away.
Spousal Registered Retirement Savings Plans (RRSPs)
RRSPs are a popular retirement plan for many Canadians. But can you contribute to your spouse’s account? Type of.
You cannot contribute to a spouse’s individual RRSP. This can lead to potential attribution penalties from the rating agency.
However, you can contribute to a spouse RRSP. And there could be a very good reason for it.
Don’t you think that a 50% pension split is enough to fully split the retirement income for you and your spouse? Is your employment and future retirement income expected to be significantly higher than that of your spouse? Or the other way around? Then a Spousal RRSP might be a good idea.
Zakk and Ella show how income sharing works with Spousal RRSPs
Let’s imagine a nice, happy 30 year old couple, Zakk and Ella. They are both employed and doing well, although their incomes are a little inappropriately. After maintaining a bar and running a coffee shop, Zack finally followed his calling two years ago and became an art teacher at Ridgemont High – he makes $ 60,000.
Ella has now been working continuously as a software developer for a growing technology company for 10 years. After increasing most of the years, she is now making $ 90,000. Ella is the higher earner. After paying off debts and expenses, she donates $ 12,000 to a spousal RRSP for her husband Zakk.
Ella deducts the RRSP contribution from her income, which also reduces her personal annual RRSP contribution limit. That would help her get a tax refund, or at least lower the taxes she pays that year.
In this case, since Zakk is the lower income spouse, he is the person authorized to withdraw the money from the RRSP. There is one little complication, however … if you want to take the money out to use, the helmsman comes! How do you deal with it?
Spouse Assignment Rule – How withdrawals from spouse RRSPs are taxed
Zakk would like to withdraw from the Spousal RRSP. Let us assume that his resignation is equal to or less than the contributions Ella made in the year of resignation or in two previous calendar years. In this case, the rating agency will tax the amount paid to the contributor Ella (credit him). Zakk is not taxed despite being the official holder of the spouse RRSP (as a lower income spouse).
However, if Zakk wishes to resign from Spousal RRSP but Ella has not contributed this year or in the previous two years, he will be taxed (attributed) on that income.
There are exceptions where the spouse assignment rule would not apply, e.g. B. if Ella died in the year the funds were withdrawn, or if Zakk and Ella, among other things, became non-residents. The best way to use this strategy is to speak to your financial advisor.
Distribution of pension income
You can transfer up to 50% of the eligible pension income to your spouse. But there is a catch. Eligible pension income is treated differently if you are under 65 than if you are over 65.
65 years ago, the distribution of pension income was limited to:
- Lifelong pension payments from a registered pension plan (e.g. monthly payments from a private pension)
- Certain death grants
From the age of 65, the distribution of pension income includes:
The same stuff as above plus Payments from:
- Deferred Profit Sharing Program (DPSP)
For most Canadians, this split of up to 50% is usually enough to split a couple’s retirement income for maximum efficiency. But maybe a spouse’s income is so high that there is still a gap. Well there are other strategies …
We can’t forget to look beyond registered savings plans. There are of course unregistered accounts. Here you can transfer your dividend income to your spouse so that he or she pays the tax at a lower rate.
However, there are some conditions:
- The dividends must come from a Canadian company.
- The transfer has to be all or nothing. You can’t just make a serving.
This is not a strategy for most Canadians. This can get complicated as the information on your tax receipts may not match the way you fill out your tax return. Contact a professional accountant if this is what you want to do.
Breakdown of your Canada Pension Plan (CPP)
Splitting your CPP isn’t very common (we’ll explain why below), but here’s an example of how it might work.
Let’s go back to Zakk and Ella, but years later. When Ella took time off to raise her children (even after returning to part-time work), Zakk became the higher-income earner. Now that he’s retired, he’s entitled to about $ 12,000 a year from CPP. Ella hasn’t contributed that much and only expects CPP to pay $ 6,000 a year. By sharing CPP credits, Zakk and Ella have reduced their overall tax burden.
We’re taking this example to make it comprehensive … but just to be clear – while it might work for Zakk and Ella – for many Canadians this may not be worth the effort. Your maximum CPP payment may only be around $ 1,100 per month. The tax savings on this income could be small. But hey, when you have limited income in retirement, every dollar counts.
Tax Free Savings Account (TFSA)
While this is not special A TFSA account that couples can use directly for income sharing can be part of any overall retirement income strategy. And certainly, in cases where there are large income disparities, it is better to derive income from it in retirement than to pay taxes on income derived from other types of accounts.
You can also give money to your spouse or partner under common law, who will then deposit it into their TFSA account. (Usually you can’t deposit the money directly into their account – but if it comes from a shared bank account, it doesn’t matter).
Withdrawing funds from a TFSA has no tax consequences. So make sure this is at least taken into account for your overall long-term strategy.
Do you need help understanding your spouse’s income sharing options?
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