Married Canadians enjoy several tax perks that reduce the amount of money they pay in taxes. These include pension income splitting, pooled deductible expenses, and more.
Income splitting has become less valuable over the years due to a 2016 policy change that eliminated most situations in which it can be used. If you aren’t retired or a business owner, you most likely can’t avail of income splitting. However, there is one tax break for married Canadians that can make a big difference in your finances today and in the future. In this article, I will explore how married Canadians can save on taxes with one little-known tax break.
Make a spousal RRSP contribution
A spousal Registered Retirement Savings Plan (RRSP) contribution is an RRSP contribution made by the higher-earning spouse to the lower-earning spouse’s RRSP. The tax break for making the contribution comes off the higher-earning spouse’s taxes, making it more valuable than the lower-earning spouse making their own contribution.
RRSP contributions provide a tax break (specifically a deduction). The way deductions work is that you do not pay taxes on an amount equal to the deductible expense. If your marginal tax rate is 50%, a $10,000 tax deduction saves you $5,000. So, deductions such as RRSP contributions are very much worth making.
The higher-earning spouse making a spousal RRSP contribution increases the tax break from contributing because they have a higher tax rate. Now, the flipside of this is that the tax break is identical to that of the higher-earning spouse contributing to their own RRSP. However, the lower-earning spouse will presumably pay lower taxes than the higher-earning spouse in retirement. So, on a long-term basis, spousal RRSP contributions save married couples money.
What to hold in an RRSP
If you are interested in saving money with spousal RRSP contributions, you need to know what kinds of investments you are going to hold in your RRSP. Some good ideas are Guaranteed Investment Certificates (GICs), index funds and dividend stocks.
Consider Fortis (TSX:FTS), for example. Fortis is a dividend stock with a 3.8% dividend yield at today’s prices. That’s a relatively high yield, meaning that a position in Fortis will give you a sizable dividend income. If you hold your Fortis shares in an RRSP, you will not pay income taxes on those dividends until you retire.
If you want to know exactly how much dividends you’ll get with Fortis stock, check the table below. As you can see, a $10,000 position in it pays about $384 per year.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Fortis | $64.12 | 156 | $0.615 per quarter ($2.46 per year) | $95.94 per quarter ($383.76 per year) | Quarterly |
The bottom line is, Fortis stock produces considerable dividend income. In a taxable account, any taxes incurred on the $384 worth of dividends shown above are unavoidable. If you hold your Fortis shares in an RRSP, you pay no taxes on the dividends. So, if you make a spousal RRSP contribution, holding Fortis shares in the lower-earning spouse’s account could make sense.
