I am expecting a large sum of money and my unused RRSP contribution room is limited.

Can I contribute to her RRSP and take the deduction against the income reported on my tax return?

If i invest in spousal RRSP at the end of December 2011 and withdraw in first week of January 2014 than it is only 2 years of
investment and saving approximately $1400 in tax even if i loose tax credit of about $10,000 for claiming my wife as a dependent.

I don’t mind using RRSP contribution room.

Thanks,
bobby

Thanks for your reply. The light just turned on in my head now and I see what you are saying! I lose the tax credit I would have had had she not made any taxable income.

Yes, your wife would not pay any tax, but it would probably affect your tax return. Do you claim the spouse tax credit of up to $10,382 for your wife on your return? That tax credit on your return would be affected if she has taxable income.

Ed

I’m still a little fuzzy on this. Don’t we all pay tax according to the tax bracket we fall under regardless of marital status? Hence if my wife made no money and withdrew ~10000 from her spousal rrsp (I made no contributions in previous 2 years). Shouldn’t her tax payable be almost 0 since we all pay 0 tax on roughly the first $10000 of income?

If you are single, they you are correct. But if you are married, your spouse can claim a tax credit of about $10,000, which would save her a bit over $2,000 of tax.

The tax credit is reduced for every dollar of taxable income you have, so if you withdraw $10,000 from your RRSP, then your spouse would not get this tax credit.

Ed

Your strategy works, but the downside is that you are using up your RRSP contribution room. You may be doing this for a small tax gain, instead of focusing on very large, long term investment gains.

You are doing all this to save about 10% in tax over 3 years. However, if you left the money in the spousal RRSP and invested it well, you could average 10%/year return on your investments (average stock market returns).

At that rate, your investments would double about every 7 years, so in 20 years you would have 8 times your original investment. That is significant money – and far more than the 10% tax savings from your strategy.

This may or may not apply in your case. It sounds like RRSPs are probably worthwhile for you. We find it is far more effective to focus on the big long term gains, rather than the small short term gains.

Your assumptions are basically correct, except that it is you that would pay the 21%. You get a tax credit of about $10,000 for claiming your wife as a dependent, which would save you about $2,000/year of tax.

Ed

1)33%-21% = 12% tax saving for me(i am in higher tax bracket)
The reason for doing this transaction is to save 12% tax. Again on Jan 1 2015 i will invest 10K in spousal RRSP and withdraw in
Year 2018. What do you think ?

Keep in mind that she is not working and she will not work for 10 more years.

2)I couldn’t get your point of tax-free compounding over the years. Because whatever appreciation we get on initial investment
we always have to pay tax.

Please correct me if i am wrong in any of the above 2 statements and clarify it separately what is the best thing to do and how ?

Your wife can earn $10,000 with essentially zero tax (and probably a bit more), but it still costs you money. You can claim a tax credit to claim her as en eligible dependent. The more she makes, the smaller your tax credit.

The rate on the tax credit is the same as the lowest tax bracket – about 21%. So, for all practical purposes, she is in a 21% marginal tax bracket, not a 0% tax bracket.

RRSP contributions when you are in the 21% bracket are obviously much less beneficial than for people in higher brackets, and depending on your retirement income, may have no benefit at all. TFSAs are better for people in lower tax brackets.

When your wife works, what tax bracket is she in? If she earns less than $44,000/year, then she is always just in the 21% bracket, so she is in the same tax bracket.

If you withdraw from your RRSP, what will you do with the money? If you spend it, then you will obviously be worse off in the future then if you kept it invested. If the purpose here is effective planning, not that you need the money, then I would suggest to only withdraw it if you would invest it somewhere else, such as in your RRSP, or a TFSA.

Ed

For Example,
I)If i contribute in spousal RRSP in 2011(Amount = 10K) and i withdraw(Amount = 10K) in 2014 than it will be taxed under my spousal income for
2014.If my income is 75K and she don’t have any income other than mentioned above(UCTB+HBP) how much money i can save(For Tax Year 2011) and how much
tax she has to pay in 2014 ?

II)if she don’t withdraw Amount = 10K in 2014 than how much tax she has to pay(after applying individual tax credit and all other calculations) ?

Thanks a lot for your time and help in advance.

Bobby

Yes, you got it. That is correct. The only question is whether this is a good strategy.

You might be thinking it is obvious to withdraw at a lower tax bracket, but you do lose the future tax-free compounding that you would get if you leave it in an RRSP. If you recontribute it, you are using up your RRSP contribution room.

If this is one year that your wife will have no taxable income and you have tons of RRSP room that you will never use, then it clearly works for you.

Just remember that the main benefit of RRSPs is the tax-free compounding over the years, so you usually should not do transactions ONLY for tax reasons (such as withdrawing from an RRSP just because your wife is in a slightly lower tax bracket than you.)

Ed

Please correct if i am wrong.

January 1, 2014, assuming you don’t make any more contributions to any spousal RRSP until after that. Withdrawals are taxed to the spouse if you have not made any contributions to any spousal RRSP in the year of withdrawal or the 2 previous calendar years.

Ed

Thanks,
bobby