Spousal
RRSP and Its Withdrawal-Tax Treatment
As
we all know, we can make contribution to a Spousal RRSP and take a deduction on
our tax return. Spousal RRSP is the one where contributor is the tax payer and the
annuitant (i.e.one who receives the benefit of the funds) is the spouse of the
contributor. Contribution to the Spousal RRSP uses up contributor’s RRSP limit.
However,
it is important to note the tax implications of the withdrawal from Spousal
RRSP. If there
Is
a withdrawal made by the spouse of the contributor within first three years of
its contribution, it is treated as an income of the contributor and the
withdrawal made after three years is treated as an income of the income of the
spouse. This provides us with an excellent tax planning opportunity in the
sense that contributor can avail of the higher tax break due to his higher
marginal tax rate and spouse can pay lower taxes due to her low marginal tax
break.
However,
here is the caution note for such withdrawal. When there is a withdrawal from
Spousal RRSP,
the
question that arises is how to ascertain as to out of which funds the spousal
RRSP withdrawal is made. Canada Revenue Agency will treat the withdrawal being
made from the latest Spousal RRSP contribution.
As
a result, if you made any contribution to the spousal RRSP three years before
its withdrawal, it will be
added
as an income of the contributor and not the spouse and can have significant tax
liability on your tax return.
Disclaimer: Any discussion on this
blog relating to tax matters is purely for educational purposes and not taking
any specific actions based the general tax rules described therein. Your tax
situation could be different and as a result there may be different tax
strategies applicable in your case. We do not claim the tax situations
described above to be exhaustive or conclusive. In case of any specific tax
situations or problems, you are advised to seek professional advice.
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