Finance 101

Tax hacks. Fall in love with these income splitting tips for you and your spouse

March 29, 2018


Tax hacks. Fall in love with these income splitting tips for you and your spouse

Finance 101

Want to make the most of your savings in retirement with your married or common-law spouse? The trick here is not knowing to save, but knowing how to save. Which accounts make sense?

We’ve previously covered income splitting loans, which can help high-net-worth Canadians lower the tax they pay. That said, prescribed rate loans are not the be all, end all method for most Canadian couples.

Here are some other ways to show that special person in your life that you really care… by maxing out tax savings and getting a potentially higher after-tax combined income after you stop working.

(Keep in mind, we’re just going to cover the basics here… but if you need help, our financial advisers are just a call away.)

Spousal RRSPs

RRSPs are a popular retirement savings vehicle for many Canadians. Can you contribute to your spouse’s account? Sort of – but not exactly.

You can’t contribute to a spouse’s individual RRSP. Doing so could lead to potential attribution penalties by way of a CRA audit.

But here’s the trick: you can contribute to a Spousal RRSP. And there might be a very good reason to do that.

Don’t think that 50 percent pension splitting is enough to fully split retirement income for you and your spouse? Is your employment and future retirement income expected to be significantly higher than your spouse’s? Or vice-versa? That’s when contributions to a Spousal RRSP could be a good idea.

Zakk and Ella show how income splitting with Spousal RRSPs works

Let’s imagine a nice, happy 30-ish couple, Zakk and Ella. They’re both gainfully employed and doing well for themselves, though their incomes are a little mismatched. After stints tending bar and running a coffee shop, Zack finally followed his calling two years ago and became an art teacher at Ridgemont High.

He earns $60,000. Meanwhile, Ella has been working continuously for 10 years as a software developer with a growing tech company. After raises most years, she now earns $90,000.

Ella is the higher earner. After paying off debt and expenses, she contributes $12,000 to a Spousal RRSP for her husband, Zakk.

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Ella deducts the RRSP contribution from her income and that $12,000 contribution reduces her personal annual RRSP contribution limit. That would help her get a tax refund, or at least lower the taxes that she pays that year.

In this case, because Zakk is the lower-income spouse, he is the person authorized to withdraw the funds from the RRSP. However, there is a little bit of a complication…

If you want to take out that money to use it, here comes the tax man! How do you deal with that?

How withdrawals from Spousal RRSPs get taxed

Zakk wants to make a withdrawal from the Spousal RRSP. Let’s say that his withdrawal is equal to or less than contributions Ella made in the year of withdrawal or two preceding calendar years.

In that case, the CRA will tax the withdrawal amount back to the contributor, Ella. But Zakk won’t get taxed, even though (as the lower-income spouse) he is the official holder of the Spousal RRSP (probably the lower-income spouse).

Let’s take a different case: Zakk wants to make a withdrawal from the Spousal RRSP, but Ella hasn’t made a contribution that year or in the preceding two years. In that case, he’ll be taxed on that income.

There are exceptions where the spousal attribution rule wouldn’t apply, such as if Ella died the year the funds were being withdrawn. It also wouldn’t apply if Zakk and Ella became non-residents. There are a few other technical exceptions, so if you’re using this strategy, best to chat with your financial adviser.

Now, Spousal RRSPs aren’t the be-all, end-all of income splitting strategies. There is also…

Pension Income Splitting

You can transfer up to 50 percent of eligible pension income to your spouse. However, there’s a catch.

Eligible pension income is different when you’re under 65 than when you’re over 65. Here’s how:

Before 65, pension income splitting is limited to:

  • Lifetime annuity payments from a registered pension plan (eg. monthly payments from a private pension)
  • Certain death benefits

65 and over, pension income splitting includes:

The same stuff as above, plus payments from:

  • RRIF
  • Deferred Profit Sharing Program (DPSP)

For most Canadians, this up-to 50 percent splitting is usually enough to split couples’ retirement incomes to maximum efficiency. But maybe one spouse’s income is so high that there is still a gap? Well, there are other strategies…

Non-registered accounts

RRSPs are not the be-all, end-all of investment accounts. There are of course non-registered accounts. For these, you can transfer your dividend income to your spouse for tax purposes. You have your spouse pay the tax on the dividend income at a lower rate.

There are a few conditions, though.

  • The dividends must be from a Canadian corporation.
  • The transfer must be all or nothing. You can’t just do a portion.

This is not a strategy for most Canadians. It can get complicated because what is recorded on your tax slips may not line up with how you complete your tax return. You’ll want to consult with a professional accountant if you’re looking at doing this.

Splitting your CPP

Splitting your CPP is not terribly common (we’ll explain why, below) but here’s an example of how it could work.

Let’s go back to the case of Zakk and Ella (many years later). When Ella took time off to raise their children (and even after she went back to work part-time), Zakk became the the higher income earner. Now that he is retired, he is entitled to about $12,000 a year from CPP. Ella didn’t contribute as much and now is expecting only $6,000 a year from CPP. By sharing CPP credits, Zakk and Ella could lower their total tax bill.

We’re including this just to be comprehensive… but just to be clear, while it might work for Zakk and Ella, for many Canadians, this might not be worth the trouble. Your maximum CPP payment might only be around $1,100 a month, each. The tax savings on that income could be meagre. But hey, if you’re on a limited income in retirement, every dollar counts.

Tax Free Savings Account (TFSA)

While this is not specifically an account that couples could use directly for income splitting, the TFSA can be part of anyone’s comprehensive retirement income strategy. And certainly, in cases where there is a big disparity of incomes, it may be better to draw income from this in retirement, instead of paying tax on drawn income from other types of accounts.

You can gift money to your spouse or common-law partner, who would then put it into their TFSA account. (You can’t ordinarily directly contribute the money into their account – but if it’s coming from a joint bank account, it won’t matter).

There are no tax consequences to withdrawing that money… so, make sure it’s at least considered for your overall long-term strategy.

Need help understanding your options for spousal income splitting?

Hey, that’s what we’re here for. If you’re a CI Direct Investing client, you get unlimited, no-commission advice from a financial adviser who is looking after your interests. Ask them about how spousal income splitting could help you achieve your financial goals.

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  1. Brian

    "You can gift money to your spouse or common-law partner, who would then put it into their TFSA account. (You can’t ordinarily directly contribute the money into their account – but if it’s coming from a joint bank account, it won’t matter). There are no tax consequences to withdrawing that money… so, make sure it’s at least considered for your overall long-term strategy." This is interesting let's say at the end of each year about December 15 my wife withdraws all money from her TFSA. In January I give her $57500 to deposit each year. I do this every year for 10 years increasing at the new TFSA savings limits. Your saying I have successfully with no attribution transferred more than $500,000 to my wife?

    • Jonathon Narvey

      Hey Brian. It’s true that you could gift/contribute $57,500 this year if you had the room available. But after that, if you decided to gift money to your wife and she used the TFSA using your proposed deposit/withdrawal method, the limits are relatively small (unfortunately, adding up to quite a bit less than a cool half a million...) Jan 2018 - $57,500 deposit (2018 maximum lifetime contribution limit) Dec 2018 - $57,500 withdrawal (gets added to next year’s room) Jan 2019 - $63,000 ($57,500 withdrawal plus $5,500 new room) Dec 2019 - $63,000 withdrawal (gets added to next year’s room) Jan 2020 - $68,500 ($63,000 withdrawal plus $5,500 new room) Dec 2020 - $68,500 withdrawal (gets added to next year’s room) Jan 2021 - $74,000 ($68,500 withdrawal plus $5,500 new room) ……. Etc, etc. I have just used $5,500 as the contribution room example but over the next few years it will jump up to $6,000 (current rules of inflation adjustment in $500 increments). Hope that helps clarify how it could work!

  2. Brian

    Thanks for the reply but I'm not really clear. After about 4 years I think I could move $263,000 of my non-registered Gics to My wife's account and "wash" away attribution rules buy using my money for her TFSA contributions. Year one is $57500, Year 2 she withdraws the $57500 and then I give her $63,000 each year it rises by her maximum contribution + the additional $5500, each year she takes the money out of her TFSA and buys new Gics (or whatever) in her name. The limits IMHO are not small being more then $55- $60,000 plus per year.

    • Jonathon Narvey

      Hey Brian. Here's how it works. If you gift your spouse money to invest in their TFSA and that spouse withdraws the money, that money is subject to investment attribution rules. That means the interest she earns on the GICs would be attributed back to you. Hope that answers your question!

  3. raymond

    re spousal RSP withdrawal attribution. Is the no contribution in 3 years per spousal RSP account or global to the people? For example... if Ella contribute to 12K to [email protected] account in year 0, make no other contributions until year 4 ; then contribute 3K to new.spousal @BNS because BNS offers a better pkg, Can Zakk take out 10K @TD in year 4 without attribution to Ella or does a spousal contribution anywhere taints all spousal withdrawals?

    • Jonathon Narvey

      Hey Raymond. Good question. The attribution rules are global. As such, using multiple Spousal RRSPs to avoid attribution won’t work. Hope that helps!

  4. raymond

    Thank you; Good to know.

  5. Liz MacNamara

    Can you contribute to a new spousal RRSP for a common law spouse you live with [more than 12 months] even though you are not divorced and legally married to a 1st spouse? Assume no spousal RRSP for spouse #1. Does the answer change if you had previously created a spousal RRSP for spouse # 1?

    • Jonathon Narvey

      Hey there! Your situation is somewhat unique. You may need to consult with a lawyer regarding the legal status of your marriage before we can provide any financial advice. Best of luck!

  6. Ed Wiersema

    I have no RRSP room and have used the $2,000.00 over contribution limit. I was married for 13 years and did spousal RRSP contributions. Is there any way i can get the contribution room back used during the marriage

    • Jonathon Narvey

      Hey Ed. We are not aware of any circumstance where you could get back your RRSP room. However, you should probably speak with a lawyer if you are looking for a fairness ruling.

  7. Jay

    Hi Jonathan, I am a Canadian tax non-resident working in Dubai and my spouse is tax resident in Canada, If i gift her cash for investing now would attribution rules apply considering I would be becoming a Canadian Tax Resident after some months? Thanks in advance

    • Jonathon Narvey

      Hey Jay. While we are certainly not cross-border tax experts, it may be safer to wait until you return to Canada and “loan” your spouse the money at the prescribed rate (currently 2%). This could be a good way to split investment income. However, feel free to reach out to one of our advisers so we can better understand your situation and provide tailored advice.

  8. Jeanine Suter

    Okay, using Zakk and Ella again as an example. Ella contributes to spousal RRSP and the following year Zakk decides to take the money out and receives a T4RSP. Ella has to claim that money (say $2,000) as income but the T4RSP shows tax being deducted. Ella should be able to claim the tax deduction as well, correct? The T4RSP in its entirety becomes Ella's responsibility?

    • Jonathon Narvey

      Hey Jeanine! A $2,000 withdrawal would be subject to 10% withholding tax, so Zakk would only receive $1,800. Then Ella would include the $2,000 in her taxable income and could use the $200 withholding tax to offset some of the income tax she will owe on Zakk’s withdrawal. So yes, the T4RSP details will be her responsibility.

  9. Hector Waldron

    My former partner & I had a $65,000 SPOSAL RRSP when we split-up in 2016 that was signed over to me. It's now valued at $61,000. I'm 64 & semi-retired but plan on working into my 70's for economic reasons. Obviously I'm not pleased with the overall performance of portfolio and, would like some sound advice.

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