# Spousal RRSP strategy for a stay-home spouse?



## kemamusa (Aug 19, 2013)

Hi,

I've recently found out about Spousal RRSPs and I was wondering if this tax deferment strategy is a valid one.
I'm in a situation where my wife will be a stay home mom, therefore her income being $0, for the next 6 years and I'll earn about $90,000 a year.

Since her income will be $0 for the foreseeable future, my goal is to contribute as much of my income as possible to her spousal RRSP at the end of the year in 2013, and in 3 calendar years(in 2016), have her withdraw my yearly contributions every year with very low taxes to put them in her TFSA (which will have room for $42000 by 2016).

So here's an example scenario.

Taxable income: $90,000 (Marginal tax rate of 38.29% - Average rate of 23.49%)
Yearly contribution to Spousal RRSP: $15,000
*Tax rebate: $5,053*

It gives me enough rebate to nearly max out my own TFSA.

Beginning in 2016, my wife withdraws my yearly contributions.
Taxable income: $15,000 (Marginal tax rate of 20.06% - Average rate of 5.77% because of Basic Personal Amount)
*Taxes Paid: $866*

*Total Tax Savings: approx $4200 / year.*

We could leave her RRSP as is, but her plan is to start working again once our baby goes to elementary school in 6 years, so I thought we'd maximize our tax savings during her no-income years by withdrawing from RRSP at super low tax rate and max out our her TFSA with that. She has $0 in her TFSA currently, but I figure that once we start withdrawing $15,000 per year in 2016 from her Spousal RRSP and fund the TFSA over the next 5 years, we can max out her TFSA by 2020 ($64000 assuming yearly contribution room increase of $5500). 

Do you think this is a valid plan? Am I actually going to save $4200 per year in taxes this way?

Thanks.


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## jamesbe (May 8, 2010)

Whoa, I never thought about this.... this is a great idea actually.... geez louise!

Sorry to hi-jack your thread a bit... My wife doesn't work and her spousal RRSP has LOTS of money in it. This seems to really make sense to me, take out of RRSP and put in TFSA for tax free growth...

Not only are you saving $4200 now you could be saving 10's of thousands upon retirement.

Oh TFSA how I love thee.


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## MrMatt (Dec 21, 2011)

kemamusa said:


> Hi,
> It gives me enough rebate to nearly max out my own TFSA.
> 
> Do you think this is a valid plan? Am I actually going to save $4200 per year in taxes this way?
> ...


Why not contribute to your TFSA as you go, you could even have them reduce your tax withholding so you're not giving interest free loans to the government.

Well you get to save that once, (2013 to 2016) but you burn $15k in RRSP room to get it. I wonder if decades of tax deffered growth is worth it. If you can wait 3 years for that cash, do you really need it at all?


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## jamesbe (May 8, 2010)

Because he would then lose $5500 to the gov in taxes....

I don't see this as burning room in your RRSP, you've used it wisely to defer taxes by moving money from the high earner to the low income earner. It's kind of genious... if this is allowed.


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## MoneyGal (Apr 24, 2009)

This isn't a tax deferral strategy; technically this is tax arbitrage.


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## jcgd (Oct 30, 2011)

But then you don't get to grow all that contribution room tax free for the next 30 years. I'm not sure what the best deal is, but there are more calculations to run.


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## jamesbe (May 8, 2010)

MoneyGal said:


> This isn't a tax deferral strategy; technically this is tax arbitrage.


The legal, or illegal kind?


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## jcgd (Oct 30, 2011)

Legal as long as you follow CRAs rules. Attribution rules for the contributions and such, which it seems the OP has considered.


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## MoneyGal (Apr 24, 2009)

Arbitrage is legal; this has nothing to do with tax evasion or avoidance. My point is just that this is not a tax deferral arrangement. While there may be some modest tax deferral, this is a proposal designed to take advantage of differential tax rates - which is the definition of arbitrage. 

Same thing with, for ex, contributing to an RRSP in a high-tax bracket, withdrawing through the HBP or LLP, and then - so long as income during the required repayment years is taxed at a lower rate than income during the contribution years - foregoing required repayments.


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## Xoron (Jun 22, 2010)

jamesbe said:


> The legal, or illegal kind?


Completely legal. Just need to wait the appropriate time (3 years) before withdrawing the funds, or they'll get attributed back to you Jamesbe (and you'll pay taxes).

One other note, once that RRSP room is used (and diminished by withdrawing the funds), they can never be recovered. But if you put that money in a TFSA as suggested by the OP, then it's a moot point.


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## stanimal (Aug 20, 2013)

OP, as you are planning, your strategy won't be allowed due to the attribution rules.

Unless you contribute $0 to the spousal RRSP in 2014 and 2015 (and 2016), any amount your wife withdraws from the spousal RRSP in 2016 will still be attributed back to you, and you will be required to pay the tax on it

The 3 year attribution rule is inclusive of all spousal contributions and not tied to when specific contribution amounts are made.


Source: Income Tax Act s. 146(8.3)

_If the funds are withdrawn within 3 years of a contribution to a spouse's RRSP, all or part of the withdrawn amount will be taxed as income to the spouse who made the contribution. The Income Tax Act indicates that if an amount taken from the spousal RRSP would normally be taxable income in the hands of the spouse who is the annuitant of the RRSP, the following will be included in the taxable income of the contributing spouse - the lesser of:

- the total of all contributions to the spousal RRSP by the contributing spouse in the year, or in one of the two immediately preceding taxation years, and

- the amount withdrawn_


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## jamesbe (May 8, 2010)

Great! Next year I may start doing this. Now how the heck do we know which funds were there 3 years and which were not?

I have over 100k in spousal RRSP that was contributed over the past 10 years. Some of it is sitting in funds I don't want anyways, I see no reason to cash those out $5500 a year fort he next few years and move them into TFSA.

I'll talk to my accountant more about this, but this seems easy enough to prove.


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## Homerhomer (Oct 18, 2010)

jamesbe said:


> Great! Next year I may start doing this. Now how the heck do we know which funds were there 3 years and which were not?
> 
> .


not so fast ;-)
It's 3 years from your last spousal rrsp contribution, so if you contribute to your spousal rrsp in 2006, and again in 2008, and again in 2010, it means that to withdraw any of these funds and for it to be the spousal income 3 years has to pass since the last contribution (in this case 2010) and not 3 years since you first contributed in 2006.


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## Eclectic12 (Oct 20, 2010)

jamesbe said:


> Great! Next year I may start doing this. Now how the heck do we know which funds were there 3 years and which were not? ...


What funds have been there for three years is irrelevant. 

What matters is for the higher tax person to make *no contributions* to the spousal RRSP from the date of the last contribution plus two calendar year.

The example in this link is that where the last high income earner contribution was made Feb 1st, 2012 - the withdrawal by the spouse that avoids the attribution rules (i.e. pay the higher tax rate instead of the lower one) is Jan 1st, 2015.

http://www.theglobeandmail.com/glob...awing-money-from-spousal-rrsps/article536063/

Other Links:
http://www.moneysense.ca/2011/10/04/the-facts-on-spousal-rrsp-withdrawals/
http://gailvazoxlade.com/blog/archives/4563


Cheers


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## MoneyGal (Apr 24, 2009)

It is critical to understand that it is *calendar years* you are measuring, and *contributions,* not purchases. 

(Electic makes that point very well, I'm just underscoring it.)


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## Eclectic12 (Oct 20, 2010)

jcgd said:


> But then you don't get to grow all that contribution room tax free for the next 30 years.
> 
> I'm not sure what the best deal is, but there are more calculations to run.


I haven't run the numbers but I'd expect that refunding the top tax rate and then paying a lower rate to end up with tax free growth instead of tax deferred growth is likely to be a good deal. :biggrin: 




Xoron said:


> ... One other note, once that RRSP room is used (and diminished by withdrawing the funds), they can never be recovered.
> 
> But if you put that money in a TFSA as suggested by the OP, then it's a moot point.


Not only is there the tax free growth, after the tax deferred growth - there is what I believe is another benefit here. 

It is true that the RRSP contribution used then destroyed by the withdrawal is gone. However, the plan is for the lower income spouse to eventually go back to work. This will mean that new RRSP contribution room will be earned and any contributions at that point will be reducing what is probably going to be a higher taxable income.

It also may mean that the tax rate at contribution for these later RRSP funds is similar or higher than when it is eventually withdrawn at retirement (unless there's another low / no income period to withdraw).


Cheers


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## jamesbe (May 8, 2010)

Ah thanks, well that hoses that idea for me. Sorry originally poster -- works for you though!


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## Maybe Later (Feb 19, 2011)

Should you not also take into account that the high earning spouse will also lose the tax credit for claiming the non-earning spouse and possibly the children as dependants into the calculation? On the other hand, these will be claimed by the lower earning spouse, possibly increasing the amount which could be withdrawn tax free.

In addition, there are some expenses which are deductions rather than credits, but that must be claimed by the lower earner first until his or her taxable income is zero. Playing with a tax program might help in deciding how much to withdraw in any given year, perhaps in December when the year's expenses are largely known - if you wanted to optimize tho the final dollar. 

The numbers will also change slightly because of the $100 monthly per child under six (CCTB?) that is income attributed to mom.

Someone please correct me if I'm wrong.


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## MoneyGal (Apr 24, 2009)

Not wrong.


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## kemamusa (Aug 19, 2013)

Thanks, for all the replies.
It certainly clears things up. So, if what I gather from your posts are correct, I get to contribute to my wife's Spousal RRSP once, and sit on it for 3 calendar years.

Basically, the scenario of contributing to her Spousal RRSP $15,000 every year for 3 years doesn't work because it keeps pushing back the year in which she can withdraw her money.
So, I should just contribute $45,000 once (or as much as my 2013 contribution limit) at the end of 2013, then let her withdraw $15,000 in 2016, and 2 more following years after that to save $4200 each year?

The only down side to this is that I can't contribute to her Spousal RRSP from 2014 to 2018.
Over those five years, $12,600 (4200x3) that we will save from $45,000 contribution works out to be 28% "gain/tax savings".
Maybe if I achieve 5% annual growth on $45,000, the end result might be the same $12,600 by 2018.
But then again, there's no guarantee that I'll ever achieve 5% annual growth 5 years in a row while the tax deferment route gives me guaranteed 28%.


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## gwcanuck (Apr 27, 2009)

I had my planner look into this last year (pulling money from my wife's RRSP to fund TFSA), as my wife has been off work since our youngest was born. Turned out it was not worth it for the reasons Maybe Later outlined - the loss of my tax credit wiped out the gains. And I thought I'd found a clever loophole!


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## Pyrexid (Feb 5, 2021)

So I last made a deposit to my wifes RRSP in 2017. I know the rule is to keep it in for at least 3 years with no deposits without withdrawing so that it gets taxed under her tax bracket. Now she took out some money in 2020 and I was wondering if I can make a deposit to her account in 2021 prior to the March RRSP deadline and claim it against my 2020 contribution? This would effectively make it so I am doing a deposit and she is making a withdraw on the same years tax return although it was done in two different calendar years. Is this allowed?


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