Spousal RRSP’s/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.
For 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, the stay-at-home 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 contributor.
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 your resources?
- 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 Options
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 personal liability.
- 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.