Allowing your savings to grow tax-free is ok, but not the be-all of investing. Don’t forget that RRSP’s tax capital gains at 2x the rate of non-registered investments, because its taxed at income rates, not Capital Gains. Depending on your investment strategy, and plans for the income, it might be better to keep your money elsewhere.

For example, without this, you get an effective basic personal amount of about $18k. Now when s/he withdraws, s/he uses up the $9k, and you only have $9k. Therefore, you’re giving up $9k in basic personal amount to gain… $9k tax free contribution. And also burning up contribution room.

I would not worry about this strategy if you do it once. It is relatively common to take some money out of a spousal RRSP when you have a low year. GAAR might become a factor if you did it repeatedly every 4 years.

I wouldn’t really call this a loophole. The benefit is really not that large. Remember, in the year your spouse withdraws, you would otherwise be able to claim her as a dependent. In essence, you will either pay tax or lose tax savings of 21% on the amount of the withdrawal, so it is still in essence taxed at 21%.

Your rate could be the top rate (say 46%), but that means you save 25% once every 4 years. You can’t do this with a very large amount, because your spouse would get into the higher tax brackets when you withdraw.

A better strategy could be to just keep building up the spousal RRSP until 10 years or so before retirement. Then wait 3 years and start withdrawing an amount every year.

GAAR would not apply because you are funding an early retirement.

The problem with these strategies is that there is a tendency to miss the real benefit just to save a little tax. The tax-free compounding from leaving your investments in your RRSP for many years can be a much bigger benefit than just a little tax saved.

It is more effective to create your entire retirement/investment/tax plan to create the retirement that you want and then see if some tax strategy like this might fit into it. Focusing on saving a few bucks on a tax strategy can take you away from your real plan that should have much larger benefits.

Ed

I just thought of a major flaw to this strategy. The strategy ignores the fact that the working spouse will get the spousal credit which will be reduced dollar for dollar by the say at home spouse’s income above 500 or so. the only advantage to this strategy would be the tax rate differential between the low tax rate and whatever tax rate the working spouse is at.

To put dollars to this issue. Spouse A who has employment income of 80,000 and spouse B who has income of 0 both resident in Ontario. Spouse A will pay tax of 19,984. If spouse B withdraws 10320 (the federal basic personal tax credit) out of a spousal RRSP and spouse A contributes 10320 to an RRSP, then A will pay taxes of 18,374. Therefore there is only a savings of 15.6% which is approximately equal to the difference in marginal tax rate between the lowest rate and the 80,000 marginal tax rate. (These numbers are from the calculator at taxtips.ca)

Overall this generally should be a valid way to split income.

The point Ed is making is not that it isn’t a scheme but that the onus is on CRA to provide evidence that it was pre-planned. That is not going to be easy.

Isn’t that exactly what it is??? An entire pre-planned scheme?

I would avoid an investment scheme that would require me to *trick* the CRA.

I cant see how this is a “loophole”. They are the rules. Dump cash into a spousal, wait 3 years and its hers to do as she pleases, be it quit work and raise a family, go back to school.
If CRA attacked this then what next? Will they go after your RSP if you retire before 65 because you are really “supposed” to work until that age.
WHat about the RSP meltdown? I think GAAR is very scary. If they were to use GAAR they could pretty much question anything a taxpayer does if they thought it was questionable.
CRA already has lots of rules stacked in their favour (have to declare capital gains when putting into an RSP but you cant claim losses) so they should just stay the hell out of everyone’s life.
Maybe we should all quit working and sit on welfare, and then see how CRA likes it.

At that point, they didn’t have a lot of extra dollars to be contributing to RRSPs at all, so they withdrew from spousal and put right back into the working parents RRSP and got a tax deduction.

Absolutely agree this is doesnt’ work if you max out RRSP contributions.

However, I would be much more wary of GAAR applying. Although it hasn’t been used much in the past by CRA, it is definitely becoming much more prevalent. GAAR’s application has already been successful in a number of cases, including at least one at the Supreme Court level (decided in favour of CRA).

Historically, RRSP’s are definitely one of the major areas that CRA has actively applied GAAR. With the recent concerns about TFSA overcontribution abuses, I would not be surprised to see CRA aggressively going after taxpayers trying to take advantage of RRSP and TFSA rules.

Why can’t it just be simple?

My ex, on the other hand, had a large amount of contribution room left. There is no way to get that contribution back unfortunately.

As for this strategy, I would think it definitely could work if your spouse retired and withdrew from her RRSP while you were still employed. But, I don’t see that type of circumstance occuring in my situation.

It’s basically just having the lower income spouse withdraw from the rrsp at a lower marginal rate. I don’t see why the CRA would have any problem with this. The money was contributed into the spousal rrsp, it stayed there for the minimum 3 years and then it was withdrawn. At that point you can do whatever you want with it.

This is the same strategy as someone who has variable income contributing more to the rrsp in the good years and then doing some withdrawals in the “bad years”.