Canada's tax system is based on tax brackets. The more income you make, the more taxes you pay on that income. Therefore, if you can move income from someone in a high tax bracket to someone in a lower tax bracket, who will pay less tax on that same income, you can significantly lower your tax bill.
How Does It Work?
A Spousal RRSP is the same as a regular RRSP except that one spouse makes contributions on behalf of the other. Determine whether you or your spouse will generate most of your family's retirement income, and then open a Spousal RRSP for the spouse who will earn less. Let's assume that you are the higher earning spouse.
Your contribution to a Spousal RRSP is counted along with any contributions made to your own RRSP. The combined contributions can't exceed your individual available RRSP contribution room. In other words, you don't get any extra contribution room just because you are contributing on behalf of your spouse.
The Spousal RRSP - and any contributions made to it - is owned and controlled by your spouse. When money is withdrawn, it is included in your spouse's income, and taxed at their tax rate, provided the contributions have been in the Spousal RRSP for at least three years (otherwise, it's taxed at your rate). If you have planned correctly, that rate should be lower than yours.
The advantage of a Spousal RRSP is that it allows you to pay less tax in your retirement years, while at the same time allowing the higher-earning spouse to claim the deduction in the year of the contribution. If you would like to find out more about Spousal RRSP's, or want to discuss whether a spousal RRSP is right for you, please give me a call at (604) 875-8878, or e-mail me at michael@arbetov.com to set up an appointment.
Mykhaylo Arbetov, CFP, FMA
ph. : (604) 875-8878
michael@arbetov.com
www.ArbetovInsurance.com
Article Source - http://arbetov.com/en/managearticle.asp?c=140&a=11
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