BET­TER OR WORSE

How your clients can get the most from spousal RRSPs — and when to avoid them.

Investment Executive - - CONTENTS - BY DONALEE MOULTON

more than a decade after the fed­eral govern­ment first al­lowed the split­ting of pen­sion in­come, spousal RRSPs con­tinue to make good sense for many of your clients.

“[Spousal RRSPs] are very sim­ple and straight­for­ward,” says Jamie Golombek, man­ag­ing direc­tor of tax and es­tate plan­ning with Cana­dian Im­pe­rial Bank of Com­merce’s wealth strate­gies group in Toronto. “All ad­vi­sors should speak to their clients about the ben­e­fits of a spousal RRSP.”

Th­ese plans are in­tended for cou­ples, both com­mon-law and mar­ried, who have dis­sim­i­lar in­come lev­els, notes Ed Rem­pel, a cer­ti­fied fi­nan­cial plan­ner in Toronto.

“You’re us­ing your own RRSP con­tri­bu­tions, but you’re putting them in an ac­count in your spouse’s name,” he says. “The goal is to have both tax brack­ets rel­a­tively equal.”

The con­tri­bu­tion to the spousal RRSP, which comes out of the al­low­able RRSP al­lo­ca­tion for the higher-in­come earner, works like any RRSP. The con­tri­bu­tion pro­vides in­come tax de­fer­ral in the year the con­tri­bu­tion is made, and helps re­duce taxes dur­ing re­tire­ment.

In­come split­ting, the foun­da­tion of a spousal RRSP, can lower a cou­ple’s over­all tax bill. In­stead of the higher earner pay­ing taxes in a high bracket, some in­come — up to 50% of the higher-in­come earner’s pen­sion in­come — can be shifted to the low­er­in­come spouse.

If a client vi­o­lates the three-year rule, money with­drawn dur­ing that pe­riod will be taxed in the con­trib­u­tor’s hands

With a spousal RRSP, all of the even­tual with­drawals are taxed in the hands of the lower-in­come spouse.

In­come split­ting also pro­vides ben­e­fits when cal­cu­lat­ing old-age se­cu­rity (OAS) ben­e­fits and any po­ten­tial claw­backs a client may face. Cur­rently, OAS re­quires ben­e­fits to be clawed back once per­sonal an­nual in­come ex­ceeds $53,215. Con­tribut­ing to a spousal RRSP can help a higher-earn­ing spouse re­main be­low that level.

“[In­come split­ting] is a use­ful plan­ning tool,” says Rem­pel. “If you plan it right, you can pay fewer taxes after re­tire­ment.”

There are a few rules that re­quire par­tic­u­lar at­ten­tion. First, there’s a time re­quire­ment. Says Golombek: “Be wary that spousal RRSPs are not meant for short­term in­come split­ting. There is a three-year ‘look back’ rule.”

Un­der this rule, the taxes on with­drawals from a spousal plan will be taxed in the plan­holder’s hands only if no con­tri­bu­tion has been made to the spousal RRSP for that per­son in the year of with­drawal or in the two pre­ced­ing years. That re­quire­ment is in­tended to pre­vent a high-in­come earner from con­tribut­ing to a spousal RRSP, then re­mov­ing the money a short time later and hav­ing them taxed at the rate paid by the lower-earn­ing spouse.

If a client vi­o­lates the three-year rule, any amount with­drawn dur­ing that pe­riod will be taxed in the con­trib­u­tor’s hands. De­ter­min­ing when the three years be­gin can be con­fus­ing, ac­cord­ing to Golombek. The key, he says, is to re­mem­ber that the rule ap­plies to cal­en­dar years.

The three-year time frame also can help you and your clients plan more ef­fec­tively, Rem­pel adds: “Most ad­vi­sors would be aware of this rule, but may not know how to use it be­cause they don’t do de­tailed re­tire­ment plans.”

A de­tailed plan, he adds, would show whether your client should use a spousal RRSP, and how much to de­posit into it.

A spousal RRSP also is a way to de­fer taxes for clients no longer able to con­trib­ute to an RRSP be­cause of their age. As long as one spouse is 71 years of age or younger, the other spouse can con­trib­ute to that spouse’s RRSP and claim the tax de­duc­tion.

And in the event of the plan­holder’s death, trans­fer­ring own­er­ship of the ac- count is sim­ple: a copy of the death cer­tifi­cate and a let­ter re­quest­ing the RRSP be put in the spouse’s name is all that is re­quired. “[The process] is not oner­ous,” Rem­pel says.

As well, even though no con­tri­bu­tions can be made to a de­ceased in­di­vid­ual’s RRSP after the date of death, con­tri­bu­tions can be made to the lower-earn­ing sur­viv­ing spouse’s RRSP in the year of death or dur­ing the first 60 days after the end of that year.

There are a few po­ten­tial down­sides to spousal RRSPs that you should make your clients aware of. First, Rem­pel says, a spousal RRSP is an ex­tra ac­count that will have to be tracked separately. Sec­ond, he adds, RRSPs, in­clud­ing spousal plans, are not for ev­ery­one. The im­pact of later in­come from the spousal plan on mat­ters such as tax rates and claw­backs on govern­ment ben­e­fits must be as­sessed be­fore money is con­trib­uted to the spousal RRSP.

Con­trib­u­tors also need to un­der­stand that when they de­posit money i nto a spouse’s RRSP, it’s no longer their money. “Once you’ve put it into a spousal RRSP, you can’t get it back,” Golombek says.

So, for cou­ples un­lucky in love, the spousal RRSP be­longs to the lower-in­come earner. It’s also an as­set of the mar­riage, and nor­mally would be treated as prop­erty that ul­ti­mately is di­vided in the event of a di­vorce.

Talk to your clients about the po­ten­tial ben­e­fits of a spousal RRSP, says Rem­pel: “Most clients don’t un­der­stand this at all. You need to ed­u­cate them.”

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.