The Registered Retirement Savings Plan (RRSP) is a savings vehicle formed by the Canadian government which was introduced to the public in 1957. The intent is to help Canadians build long-term savings for their retirement.
How do RRSP’s work?
Each year, Canadians with “earned income” who file tax returns are eligible to contribute money to their RRSP accounts. The contribution limit varies each year and is set by the Canada Revenue Agency. The maximum contribution amount for 2021 is $27,830 or 18% of your earned income in the previous year, whichever is less. RRSP contributions are tax deductible. If you did not max out your contributions for the previous years, that amount will carry forward to the present year. When the funds are withdrawn, typically during one’s retirement, taxes are payable and treated as income.
Benefits of an RRSP
• Tax deduction – RRSP contributions are tax deductible, which reduces the amount of taxes payable in the year that you contribute.
• Money grows tax-free – Capital gains and dividends/interest income are not taxable for as long as they remain in your RRSP account.
• Tax deferral – Money invested in an RRSP is not tax-free, as tax is payable when the money is withdrawn. However, it is likely that one’s tax rate will be lower during retirement, so deferring taxes may result in less taxes payable.
What is a Spousal RRSP?
A spousal RRSP is a joint account with married or common-law couples, where one partner is the owner of the account and the other partner is the contributor to the account. Spousal RRSP are most efficient when there is a disparity in the amount of income/post-retirement income between partners. The spousal RRSP gives families an opportunity to split income which reduces their overall tax load.
Rules relating to Spousal RRSPs
Spousal RRSP contributions must be kept in the account for a minimum of three years after the year in which the money was invested, otherwise, the partner who contributed will have to pay tax on the money contributed as if it was their income. For example, if your most recent contribution to a spousal RRSP was in 2021, your partner should wait until 2024 to make any withdrawals.
Once you a spousal RRSP is opened, your partner may make investment decisions related to the account and withdrawals. This may lead to issues down the road should a divorce or separation happen.
Your RRSP contribution limit does not change if you have two accounts to choose from (your own account, and a spousal RRSP account). If you max out your yearly contribution on your RRSP, you cannot contribute towards the spousal RRSP account.
This article is a general discussion of certain tax and accounting matters and should not be relied upon as tax or accounting advice. If you require tax or accounting advice, we would be pleased to discuss the issues in this article with you.
