With tax season over, we are taking a look at a common misconception we came across related to spousal RRSP contributions.
Tax Myth: My spouse can deduct RRSP contributions I make to a spousal RRSP
Unfortunately, this is not the case as RRSP contributions made to a spousal RRSP are deducted on the contributor’s tax return. You will not be able to take advantage of your spouse’s tax brackets or RRSP contribution limits. The main purpose of a spousal RRSP is income splitting. The contributions are not taxed in the hands of the contributor so tax savings are achieved by moving income to a spouse that will be in a lower tax bracket during retirement.
Note that the appeal of spousal contributions has been eroded with the introduction of the pension income splitting rules in 2007, which can provide a better tool for splitting income from an RRSP. As we saw in the past with the introduction and quick elimination of the Family Tax Cut, these tax benefits can be quickly eliminated.
There is no guarantee that the relatively new pension income splitting rules will remain, but the RRSP regime has been around since 1957. Changes to the spousal RRSP regime is less likely than the elimination of pension income splitting and because of that, spousal RRSP contributions will remain a reliable tool for splitting pension income.
So why make RRSP contributions? Generally, RRSP’s benefit a contributor because they provide a tax deduction and tax-sheltered growth. This means the contribution can reduce the tax bill and the investment returns will not be taxed until payments are received during retirement. You can also choose to carry forward all or part of the contribution to a future year; this could be useful if it provides a deduction in a higher tax bracket. Deducting your entire contribution without regard to future year tax brackets could leave money on the table.
Birrer Sangret LLP can help maximize the tax benefit of your RRSP contributions and provide value added tax guidance to RRSP contributors. If you would like to know more about how we can help, contact us today.