Spousal RRSPs/Income Splitting
If there is a major difference in RRSP contribution room between
a partner/spouse, where one partner is expected to have a much larger
pension income, he/she will likely pay more taxes. With a spousal
RRSP, one spouse can contribute to increase the pension of the lower
income spouse, and still get the deduction.
young couples planning children, where one spouse plans to stay
home: The higher income spouse contributes to a Spousal RRSP
plan, during the early years, and takes advantage of a higher tax
bracket RRSP deduction. In the third calendar year from last contribution,
spouse could then remove the funds and pay less tax at their lower
tax bracket. No further Spousal RRSP contributions are allowed in
the current withdrawal year, or previous two taxation years (3 years
total). Otherwise this income is taxed in the hands of the original
- Start contributing early to your RRSP, but be aware of your
tax bracket. If at the time of contribution you are in a low tax
bracket, you may want to examine other alternatives. If you need
to access the funds later, keep in mind that RRSP withdrawals
will be added to your income, usually resulting in higher taxes.
- Do you know what effect probate, taxation, legal and accounting
fees will have on your estate? What about the projected costs
for health care, assisted living, nursing and home care? How will
the cost of each of these impact on your financial plan and drain
- In the case of retirement, how long can we expect to live based
on family history and how long after that will your spouse live?
Do you want to retain assets for your heirs or deplete all of
your assets during your lifetime?
Vested Company Pension Plans with Lump Sum Settlement
Fully vested company pension plans, after a certain number of years
of service, are defined by the plan's qualifying factor (QF). The
spouse is usually entitled to 60% of the pension upon death of the
vested employee (their spouse). At the death of the surviving spouse
the children may get nothing because the balance of the pension
reverts back to the company. You can usually commute the value of
a lump sum pension to a LIRA (locked in retirement account). By
doing this, you are able to control the investments and more importantly
designate the beneficiaries and subsequent contingent beneficiaries,
who will be entitled to 100 % of the balance (subject to taxation
rules). However, we have to compare the anticipated rate of return
of the commuted lump sum to the pension alternative to ensure comparable
returns are achievable.
- Consider possible incorporation if you are a high income earner
and self-employed. Qualifying corporate income is taxed at a much
lower rate than personal income. This may also enable you to limit
- Take advantage of legitimate in-home office expenses and income
splitting opportunities, regardless of business form.
- There is a $500,000 lifetime Capital Gains exemption for Qualified
Canadian Small Business Corporations. With an effective strategy,
you might be able to multiply this for each eligible family member.