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4 reasons spousal RRSPs still make tax sense

With the Conservative government recently backing away from plans to expand the options for income splitting, it’s a good time to revisit spousal RRSPs, a type of income splitting that can provide tax benefits for couples in a variety of situations.

A number of measures have been introduced over the years to allow retired Canadians to share their income with their spouse or partner and therefore pay less income tax. For instance, it's been possible to share Canada Pension Plan retirement benefits for more than a decade. The splitting of eligible pension income was introduced back in 2007.

Both of these measures have led some people to question whether it still makes sense to use an even earlier income-splitting measure – spousal RRSPs.

Well, the experts have an answer to that question. They all agree that, depending on the circumstances, a spousal RRSP can still offer potentially lucrative tax benefits for some couples.

The idea behind all income-splitting measures is to shift income from a family member in a higher tax bracket to a family member in a lower tax bracket. CPP sharing and pension income splitting allow for this, as does a spousal RRSP.

Spousal RRSPs allow the high-earning individual to contribute to their spouse's RRSP but claim the deduction themselves. When it comes time to withdraw the funds from the RRSP, the money is taxed in the hands of the spouse, as long as the contribution remained in the plan for at least two calendar years after the year in which it was first deposited. So, setting up a spousal RRSP can be a good idea if your spouse or common-law partner is likely to be in a lower tax bracket than you in retirement.

Here are four situations in which a spousal RRSP can provide a substantial benefit to taxpayers:

The experts say it's best to use tax software programs (or hire a tax professional) to figure out if any income-splitting or -sharing manoeuvre makes financial sense. That's because these type of moves have the potential to affect a whole range of other things, like Old Age Security clawbacks and the age amount tax credit. Tax software can optimize tax savings by suggesting the best method of splitting income.

Tax experts also say pension income splitting and spousal RRSPs are not either/or things. "Depending on your personal situation, the strategies can be combined in a manner to produce the most effective financial and tax results," notes Ernst & Young in the firm's online Managing Your Personal Taxes publication.

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