# Question??



## Shayne (Apr 3, 2009)

I am looking at feedback on the following scenario to see if there is anything I am missing.

We are currently a two income family and both have defined benefit pension plans. I have a considerable amount in my RRSP.

In the next few years I will be leaving my employer to expand my business. If I incorporate and do not take any money out of my business can I start taking money out of my RRSP and end up paying taxes on it?

Since I will no longer be contributing to a pension plan my common law would then put the same amount of money that I remove from my RRSP and place it in a spousal RRSP. She will have enough room.

She get a good tax break and I still have my retirement cash? Once all of the money has been taken out of my RRSP will start using my business for income.

We won't have any cash flow issues as we could live off of her wage if needed.

Your feed back is appreciated.


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## Robillard (Apr 11, 2009)

You always have the option of de-registering funds from your own RRSP (for which you are the owner). They are not locked in. Your broker or fund company will withhold an amount of tax based upon the amount de-registered, which generally makes removing funds from an RRSP for general use a bad idea. 

It sounds like what you want is to de-register a certain amount of funds from your RRSP, while your common law spouse simultaneously contributes the same amount to the spousal RRSP. Is this correct? As far as I know, there is nothing wrong with this series of transactions; there is no tax benefit that I can see. What is the issue here? Why can't your common law spouse simply put up capital for your business or loan you the funds? That might be more simple.


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## Shayne (Apr 3, 2009)

There has to be a tax benefit or I won't do it. I would not be working so if I withdraw around $15K a year the withholding tax will come back to me when I do my taxes as it would be my only income. 

The $15K contribution to the spousal will give my common law a $6K tax return on the contributions.

This should work out I would think.


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## OhGreatGuru (May 24, 2009)

_Why can't your common law spouse simply put up capital for your business or loan you the funds? That might be more simple._

Starting up your own business is a risky investment. Asking a spouse to fund it with her retirement money instead of self-funding with his own RRSP could be a serious issue.

Otherwise, as I understand it the OP expects low income in his start-up years, and wants opinions on whether he should make withdrawals from his RRSP to supplement his income until his business builds up. In short term it seems a good plan, as he will be minimizing tax hit on his RRSP withdrawals. Can't really say about long term without more comprehensive financial information, and some idea of how good his business prospects really are. But having a defined benefit pension up to now would help to reduce his risk to his retirement prospects, if he has worked long enough for it to be worth much.


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## Shayne (Apr 3, 2009)

I don't need start up funds for the business and we will have no issue living on her wage. 

This woud simply being done to generate some extra cash while working within the rules


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## OhGreatGuru (May 24, 2009)

Assuming you expect not to be in the lowest tax bracket at retirement, it might make sense to withdraw some now while you are in the lowest bracket. If it is surplus to your needs you could just turn around and re-invest it in a TFSA for your future retirement.


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## pantograph (Apr 6, 2009)

Something is really wierd here. Pay close attention to the pronouns in th e OPs posts.



OhGreatGuru said:


> _Why can't your common law spouse simply put up capital for your business or loan you the funds? That might be more simple._
> 
> Starting up your own business is a risky investment. Asking a spouse to fund it with her retirement money instead of self-funding with his own RRSP could be a serious issue.


Except Shayne isnt self funding. He's pulling 15k out of his RRSP and writes "I still have my retirement cash." Then his common law puts 15k (her money) into a spousal RRSP, which makes it his money all over again.

At best, spouse is burning her contribution room to help fund his business. At worst, she burns her own cash and her contribution room to help fund his business.

As someone who was once taken advantage of because I trusted a partner with finances, I think theres an aroma to this. Maybe its innocent but theres just a whiff of something not right.


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## OhGreatGuru (May 24, 2009)

Good call pantograph. I didn't catch that it was a "spousal" RRSP. If that's what he means, and not "my spouse's RRSP", then you are right, it is transferring assets from the contol of one spouse to another. This needs to be done with more care in a common law relationship, because entitlement to share matrimonial property in case of a breakup is not the same as in a legal marriage. (Even in a legal marriage it could be a problem, because spouse could withdraw and spend the money, then file for separation after the asset is gone.)

With the ability to split pension and RRSP income now, the need to equalize retirement incomes is not as great as it used to be. So simpler solution would be for wife to put it into her own RRSP.


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## Shayne (Apr 3, 2009)

Guys, there is no "funny business" going on, I am just seeing if we can work within the rules and come out ahead. 

No money is being used to fund the my business.

I am glad I did post here because there are some things I didn't consider.

Thanks!


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## Robillard (Apr 11, 2009)

I've thought about this some more, and I think there would be some sort of tax benefit if Shayne and his common law spouse were in different tax brackets, i.e., the spouse in the higher tax bracket receives a larger tax break on the funds contributed than the tax payable on the funds de-registered. Income splitting is one of the main purposes of the spousal RRSP.

Also, pantograph made very interesting point. A person's RRSP contribution room belongs to the one who earned it (by working and earning income). 

I'm not saying that this would happen, but in the event of a break up, Shayne could be the one worse off since he might lose access to the spousal RRSP assets to support retirement. As far as I can remember, the assets in a spousal RRSP are technically owned by the contributor and not the beneficiary. Does anyone know for sure? If a couple breaks up, do the assets in spousal RRSP accounts revert to the RRSP account of the original contributor? Shayne and his spouse should check with the company that administers their registered plans.


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## ssimps (Dec 8, 2009)

My take is that the OP is expecting to make money in his business initially, but keep it in the corp and not pay himself or pay himself very little, so his tax bracket is low, so removing RRSP $ now could have a tax advantage.

However I also agree that moving it into a current spouses RRSP may not be so good of an idea; even if there could be a further tax benefit. No matter how you both feel now does not mean you will feel that way in 10 years. Hopefully you do, but who knows and stat's say its a 50/50 ish call. 

However, if you can live off of just your wife's income, then why not do just that, and why take any money out of your RRSP and have no income for a while? Your wife may be able to get some tax benefit from supporting you.


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## Berubeland (Sep 6, 2009)

Living only on your wife's income will provide some incentive to get your business profitable in record time. I'm afraid lack of money is part of the motivation for success as an entrepreneur. 

I'm not sure withdrawing from your RRSP is a good idea if you can avoid it after all you lose that contribution room forever.


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## Shayne (Apr 3, 2009)

ssimps said:


> My take is that the OP is expecting to make money in his business initially, but keep it in the corp and not pay himself or pay himself very little, so his tax bracket is low, so removing RRSP $ now could have a tax advantage.
> 
> However I also agree that moving it into a current spouses RRSP may not be so good of an idea; even if there could be a further tax benefit. No matter how you both feel now does not mean you will feel that way in 10 years. Hopefully you do, but who knows and stat's say its a 50/50 ish call.
> 
> However, if you can live off of just your wife's income, then why not do just that, and why take any money out of your RRSP and have no income for a while? Your wife may be able to get some tax benefit from supporting you.


I will make money, but won't draw an income from the corp. We can live off my spouses income alone. None of the money I take out of my RRSP is needed to fund the business or pay for living expenses.

I will have $0.00 income with the exception of what I pull out of my RRSP. If I pull out around $12K a year my tax liability will be $252 dollars.

If my spouse contributed $12K a year to a spousal RRSP that would generate a return of $4K. 

We are up nearly $4k.

I guess there could be issues in there is relationship break down, but would could also put agreements in place. She is not worried about her RRSP room as she contributes to a defined benefit pension plan. 

Essentially we are just moving the money from one to the other and due to the large difference in tax brackets we come out ahead.


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## OhGreatGuru (May 24, 2009)

Robillard said:


> Also, pantograph made very interesting point. A person's RRSP contribution room belongs to the one who earned it (by working and earning income).
> 
> I'm not saying that this would happen, but in the event of a break up, Shayne could be the one worse off since he might lose access to the spousal RRSP assets to support retirement. As far as I can remember, the assets in a spousal RRSP are technically owned by the contributor and not the beneficiary. Does anyone know for sure? If a couple breaks up, do the assets in spousal RRSP accounts revert to the RRSP account of the original contributor? Shayne and his spouse should check with the company that administers their registered plans.


Quite the opposite. A spousal plan is owned by the spouse, not the contributor. Only qualification is that early withdrawals (less than 3 years after last contribution) will be taxed back in the hands of the contributor.

In the case of breakup of a marriage, each party's assets, whether owned separately or jointly, would be added up, and an equal division made (subject to a marriage contract specifying otherwise). This would include all RRSPs (spousal or otherwise). In the case of common law relationships however, many spouses are shocked to find they have no automatic right to split property in most provinces. They have rights for child support and custody, but not for division of property. And I don't think the fact that a spousal RRSP was contributed to by the other spouse would make much difference, as you can't make someone "give back" a gift. This is one reason why common-law couples should have co-habitation agreements.


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## OptsyEagle (Nov 29, 2009)

Here's an idea. Why don't you marry the girl?

Other than that, your idea is fine.


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## Robillard (Apr 11, 2009)

Thanks for clearing that up OhGreatGuru. I wasn't clear on the rules pertaining to spousal RRSPs.


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## Shayne (Apr 3, 2009)

OptsyEagle said:


> Here's an idea. Why don't you marry the girl?
> 
> Other than that, your idea is fine.


It is in the works!!!


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## sprocket1200 (Aug 21, 2009)

guru is correct on the 3 years being taxed back to contributing spouse. no way to get around this.


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## square one (Jan 19, 2010)

I can see how OP is looking to benefit from cashing in at low income tax and recontributing through spouse at higher tax bracket; very interesting! The problem could be if there is not much RRSP contribution room left as the pension plan would reduce the amount because of the pension adjustment. So the spouse might not have the room to put all the money back into an RSP.

I have an extremely good marriage where all the money brought in is 'our money' and financial decisions are made based on what is best for our family. So while I understand the concerns of those who think this guy has an ulterior motive, I can see how overall this would be a financial plus for a couple who stays together for the long haul.


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## Shayne (Apr 3, 2009)

This is exactly where I am coming from. That is the only down fall is that she will only have about $40K of contribution room. That will still put us ahead about $15K over 4 years so I think that will be the plan. It is like free money.


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## sprocket1200 (Aug 21, 2009)

I have looked at this again and the issue I see is that you remove the option later to take money out of your RRSP. from your business I would assume you set it up so that you can take dividends, T$ or any type of income which will provide low taxes for you.

But once you retire then if you have no RRSP and need more income you lose the choice to split it, as she will have all the RRSPs. I would leave some and maximize her take on the marginal tax rate side, but not do it all.


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## Shayne (Apr 3, 2009)

The funds would be in a spousal RRSP, effectively splitting income.


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## cardhu (May 26, 2009)

Clearly, there is a tax benefit to this maneouver in the short term ... when you view this from the perspective of “household” income, there is a clear shift of income from a higher bracket to a lower bracket ... the question is whether or not the short-term benefit exceeds the long term cost ... that’s a tougher nut to crack, and there are a few angles to it ... 

1.	there is the permanent loss of RRSP contribution room ... given the dual DBPs, that may or may not not be too much of an issue. 
2.	there is the possibility that a withdrawal now, even though taxed at a low rate, could still be taxed at an even lower rate in the future ... in the circumstances you describe, that may not be likely, but it is certainly well within the realm of possibility for many people. 

Projecting what tax bracket you might be in during retirement is a red herring ... it is more important to consider the tax burden attributable to withdrawals, and while that is influenced by your bracket, they are not one and the same ... it is no great challenge to face a tax burden on withdrawals, during retirement, that is far lower than your tax bracket would suggest. 



Shayne said:


> I will have $0.00 income with the exception of what I pull out of my RRSP. If I pull out around $12K a year my tax liability will be $252 dollars.
> If my spouse contributed $12K a year to a spousal RRSP that would generate a return of $4K.
> We are up nearly $4k.


Nope ... your spouse’s tax will go up by somewhere in the $2k to $2.5k range, before it goes down by $4k ... you’d still be ahead, but not by anywhere near $4k.


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