FMGT4410 Chapter 10 Lecture NotesSpousal RRSPsIn addition to contributing to our own RRSPs, taxpayers in Canada have the option to make contributions into an RRSP for our spouses or common-law partners. In ideal retirement planning, at the time a couple starts retirement, they would have approximately equal balances in their retirement savings accounts and withdraw equal amounts each year, maximizing the value of tax credits and the marginal rate tax system.In a situation where one spouse doesn’t have “earned income” or has earned income that is significantly lower than another, it would therefore make sense for the higher income spouse to make contributions into an RRSP for the lower income earner. This is a form of income splitting.The taxpayer making the contribution can take the deduction against income. The contributing spouse’s RRSP Deduction limit still applies, i.e., if the taxpayer calculates a deduction limit of $15,000 for the year:o she could contribute $15,000 to her own RRSP, or o $15,000 to her spouse’s RRSP or o split the $15,000 between the two accounts o but the amount deducted cannot be greater than $15,000.The spouse withdrawing the funds would be required to include these amounts in: o subdivision d income. 56(1)(h)The ability to contribute to a spousal RRSP was designed to enhance retirement planning. However, it also providesan opportunity for spouses to reduce taxes prior to retirement if the higher income spouse contributes and gets a deduction at the highest marginal tax rate and the lower income spouse immediately withdraws it but at a lower tax rate.There are rules that limit this attempt at income splitting in s146(8.3), essentially stating:o when there is a withdrawal from a spousal RRSP, any amounts that were contributed in the year of the withdrawal or two preceding taxation years preceding the withdrawal will be “attributed” back to the taxpayer who made them (the contributing spouse).Example:Mr. Yen sets up a spousal RRSP for his common-law partner, Audrey, in 2010 and makes a $10,000 contribution into the plan at that time. He makes no other contributions to the plan until 2017 when he deposits an additional $5,000 into the plan. In 2018, Audrey withdraws $9,000 from this spousal RRSP. What are the tax consequences, for the couple, of the withdrawal?

 

 

 

 

Solution:

o $5,000 will of the amount withdrawn will be attributed back to Mr. Yen and he will have to include It in his

subdiv d income for 2018.

o The remaining $4,000 of the withdrawal will be included in Audrey’s income.

Tax-free Savings Accounts (“TFSAs”) – introduced in Ch. 9 – s146.2

In 2009, TFSAs were introduced as an additional retirement savings vehicle for Canadian taxpayers. The features of

these accounts are:

· Any Canadian resident over the age of 17 (depends on province) can set one up.

· The amount you can contribute is not tied to your income, there is an annual limit regardless of how much

you earn:

o 2009-2012 = $5,000/year

o 2013-2014 = $5,500/year

o 2015 = $10,000

o 2016-2018 = $5,500/year

· There is no deduction for amounts contributed into TFSAs

· All growth on investments made within a TFSA is tax-free

· All withdrawals from a TFSA are tax-free. Current-year withdrawals get added back to your TFSA

contribution room in the following year.

Ideally, individuals contribute to both TFSAs and RRSPs, however, when cash is limited, an individual must make a

choice as to where to invest.