Many High Earners have a spouse that is in a much lower tax bracket, so it’s these people that will get the most out of this blog…

First we need to understand the problem; In Canada, we have a graduated tax system.  As you move through the tax brackets, each portion of your income gets taxed at a higher rate.  The tax brackets get so high so quickly, that it punishes single-income households.  For instance, a family that has one income earner making $100k will pay about $7000 more in tax than a family of two $50,000 income earners.  

In single income households, there is a benefit, then, to moving taxable income from the higher earning spouse to the lower earning spouse. Ideally, you would like to make both spouse’s taxable income equal.  So how do you do it? Enter the Spousal RRSP…

Spousal RRSP Strategy 1 – the intended use

You can split pension income in retirement, but you can’t split RRIF income until you turn 65.  If you retire before 65, and one spouse has a huge RRSP and the other spouse has no RRSP, you have a huge potential tax problem since only one spouse will be paying all the tax upon withdrawal.  Some forethought and planning can avoid this.

If you retire at 60, for instance, and through good planning you’ve contributed to the Spousal RRSP for years (then made no SRRSP contributions and waited the requisite 2+ years) you can withdraw from both spouses RRSPs and pay a lot less tax than if you only had one RRSP to draw on.

This needs to be done with years of planning ahead of time.  At the very least, 2+ years so that the income isn’t attributed back to the contributor, but more likely 5-10 years so that you can have the appropriate amount of income to last for the years before you turn 65.  The earlier you retire, the more you need to have in the SRRSP.

Spousal RRSP Strategy 2 – thinking outside the box

You can also use the Spousal RRSP to split income well before you are considering retirement.  Here’s how:

The lower income spouse opens and owns the Spousal RRSP, while the higher income spouse contributes to it.  When the higher income spouse contributes, this reduces their taxable income, and they receive the refund.  As long as lower income spouse waits 2 years (plus the current year) they can withdraw from the RRSP and the withdrawal will count as income for them.   If this is their only income for the year, they can pull out approximately $15k without paying any tax whatsoever.  The next approximately $34k or so is only taxed at 20%.

To summarize, a high earner at the top marginal tax rate could contribute to a Spousal RRSP and receive a 53.53% tax refund, then their spouse could pull from the RRSP in 2+ years and pay a very low rate of tax on the withdrawal.