But it’s still a handy vehicle for retirement
Q: Last year, I contributed to my wife’s Registered Retirement Savings Plan (RRSP). Due to a family emergency, she must make a withdrawal from her spousal RRSP. How much tax will she pay if she makes approximately $56,000?
A: As more and more baby boomers approach retirement, the Canada Pension Plan becomes increasingly under pressure to service the ever-growing number of retirees. Baby boomers will have to seek other sources of revenues to maintain their retirement years, and it is never too early to begin saving.
Spousal RRSPs are an excellent vehicle allowing the contributor a tax deduction and saves on taxes by income splitting during retirement. Many individuals contribute to a spousal RRSP because the contributor is in the higher tax bracket and is allowed to deduct from the contributor’s income. At retirement, when the funds are withdrawn from a spousal RRSP, it is taxed by the annuitant (withdrawer), who may be in the lower-income bracket.
Generally, RRSP withdrawals are taxed in the hands of the annuitant (withdrawer) not the contributor. However, there are anti-avoidance rules for money withdrawn specifically from a spousal RRSP. Contributions made by an individual to a spousal RRSP in the current year or preceding two years that are withdrawn by the spouse are taxed in the hands of the contributor. Therefore, your wife is not taxed on the withdrawal, but you (the contributor) will be. Do you remember who got the deduction last year?
There are circumstances that withdrawals from a spousal RRSP in which the anti-avoidance rules will not apply:
- You and your spouse (common law partner) were living apart due to marriage breakdown.
- You or your spouse is not a resident in Canada.
- Transfers to another spousal registered plan such as RRSP, or RRIF.
- Spousal RRSP was converted into retirement income and received no more than the regular annuity amount.
- Your spouse makes a withdrawal in the year of your death (let us hope this is not part of your long-term tax planning).
