Spousal Registered Retirement Savings Plan (RRSP) benefits are among the biggest financial perks available to married couples. In 2019, the federal government cracked down on many forms of income splitting but left pension income splitting intact. As a result, splitting pension income is one of the few remaining ways for married couples to reduce their taxes and increase their wealth. In this article, I will explore three spousal RRSP benefits that all married couples should know about.
Spousal RRSP contribution
A spousal RRSP is an RRSP owned by the lower-earning spouse in a couple to which the higher-earning spouse makes contributions. Despite contributing to the low earner’s account, the high earner gets a deduction based on their own tax rate. The result is that the couple gets a better tax break than would have been generated by the lower earner making the contribution.
That’s not to say that the lower-earning spouse can’t make contributions to a spousal RRSP: RRSP rules for married couples say that the RRSP beneficiary loses no contribution room when their spouse contributes to it. So, RRSP contributions between spouses actually have two benefits: a better tax break for the high earner and a higher RRSP balance for the low earner. Technically, the high earner gets the same tax break no matter which RRSP they contribute to. But if we start with the assumption that the high earner will transfer money to the low earner no matter what, then the spousal contribution rule saves the couple money.
Income splitting
The second way married couples benefit from RRSPs is in the form of income splitting. As mentioned at the start of the article, married couples are still allowed to split pension income, even after the Federal Government’s 2019 gutting of commuted value transfers. If you have a 50% marginal tax rate and your spouse has a 33% marginal tax rate, the two of you will lower your taxes if you give a portion of your pension income to your spouse.
Common-law couples can use a spousal RRSP
A final important thing for couples to know about income splitting is that you don’t need a marriage license to do it. Common law couples are eligible for spousal RRSP contributions and income splitting. So, don’t worry if you haven’t walked down the aisle with your partner yet: tax savings await.
Investing your RRSP money
One often overlooked aspect of income splitting is coming up with income to split in the first place. If you simply let cash sit in your RRSP, you will not maximize your future withdrawals. You want to invest in things like Guaranteed Investment Certificates, stocks, and exchange-traded funds.
A lot of Canadians invest their RRSP money in Fortis (TSX:FTS) stock. Typically, such investors hold Fortis in the context of a diversified portfolio. The stock has done well: over the last five years, it has delivered an 11.8% compound annual growth rate total return. That’s much better than the TSX Index in the same period.
What enables Fortis to deliver such good returns? First, it’s a regulated utility, which means it doesn’t face much competition. Second, it has invested in growth, which has caused its earnings to rise over time. Third, it has proven itself to be a very reliable company, having increased its dividend for 50 consecutive years. As a result of all the dividend hikes, Fortis is now arguably Canada’s only “Dividend King” stock! Producing dividends by the truckload generates a lot of income for its holders to split with their spouses.
