Canadian Tax questions: RRSP/TFSA and spouses

Factual Questions
1

Hello,

Long time lurker, 1st time poster, so I know that this crew of folks will be able to answer my question in relatively simple terms.

My wife and I are looking at how we can best maximize our tax savings by taking advantage of the breaks that the CRA has to offer while at the same time allowing our money to grow. We are married, no children, this is 1st year she has no tuition left. Currently she is in her 4th year of medical residency, I work full time.

Her income is around 66k, mine is 44k, we have a mortgage, and some student debt (30k or so). I contribute $100 a month to an RRSP outside of work, and about $120 inside of work (employer matching). She doesn’t contribute to an RRSP, pays down the student loan each month by about $350. We also have stocks, some dividend paying, some not, some US stocks, value is around $65,000, this is in an unregistered account.

My questions are:

TFSA? If you put dividend paying stocks in there, can you use the accumulated money to purchase new stocks? My understanding of TFSA is that the money put in one is not deducted from your income that year, but any income earned inside a TFSA is permanently tax free.

IE) Put $5,000 of dividend paying stock in one, dividends earn $1,000 in 1 year, you buy $1,000 of new stock (same or different company), giving you $6,000, you then have to use that $6,000 so you sell your stock. The only capital gains you have to pay is on the 1st $5,000. I think.

Spousal RRSP: As we already have quite a bit of money in stocks, but its “her” money (earned prior to marriage) can you she make a gift (or contribution) to my RRSP of say $5,000 from these already own stocks, allowing me to reduce my income by $5,000 with no tax repercussions from her?

Spousal TFSA: Same question, can we put some of the money into a TFSA under my name, creating what I believe is a tax shelter, for more this money?

Sorry for long initial post, but thanks for the help!

2

I don’t know much about the TFSA rules, but I know that when I contributed to my wife’s RRSP, it was my income that was reduced, with no tax implications for her. And it plus any contributions I made to my RRSP had to total within my contribution limit. However, it turns out that she has only a small pension (QPP is all) while I have a large one and now that splitting of pension income is permitted, it would not have made the slightest difference if all her RRSP income (now RIF since she passed 71) had gone to me. I would simply have transferred more of pension to her.

In any case, try always to maximize your and your wife’s RRSP contributions. The advantage is that the income compounds without tax. Sure, you eventually pay tax on all of it, but the before tax compounding has a powerful effect on retirement income.

3

You sound like you might be in a good position to talk to a fee-only advisor. Someone who can listen to your financial situation and goals and help you come up with a plan to reach your goals.

Beware of people who want to sell you investment products (like mutual funds) or manage your investments for a ‘small’ 1% fee/year. These kind of ‘advisors’ don’t have your best interests in mind and have every incentive to sell you products that make them to most money.

I’m assuming that you are expecting her income to go up substantially in the next few years? In other words your marginal tax rate has nowhere to go but up. In that case I’d be tempted to put as much into both of your TFSAs as possible ($25,500.00 each, assuming you’ve both been residing in Canada over the last 5 years). You can then concentrate more on putting money in RRSPs in later years when the tax savings are higher.

But don’t give up the employeer matching. Max that out or you’re just leaving money on the table.

The rules for TFSAs limits only care about money you contribute or withdraw. Any transactions you do within the account (dividends, buying and selling securities) don’t change your max contributions. In theory you could day-trade in your TFSA, buying and selling constantly; not that I think that’s a good idea.

And yes, any gains in your TFSA are completely tax free, and widthdrawals don’t count as income.

4

Your money belongs to both of you. RRSP’s belong to one or the other.
if you take $5000 from her account, your account, or a joint account (bank account, etc.) and put it in an RRSP, the taxable income of whoever owns that RRSP is reduced.
The CRA does not trace money “but that came from her bank account”. If you are married, what difference does it make whose money is whose? You make the mortage payment, she puts money into an RRSP - or vice versa… who cares?
Put it in her RRSP, then her taxable income goes down.
Put it in yours, your taxable income goes down.
I bet from what youtell us your marginal tax rate is much higher than hers. A doller from you might save 35 cents in taxes, a dollar to her RRSP reduces her taxes probably 29 cents. Therefore, your joint goal is to reduce your taxable income first until you ar equalized.

A spousal RRSP - you contribute, but the RRSP when time to cash out belongs to her. The gotcha - if it’s cashed out, any contributions in the last 5 years are your taxable income, not hers.

Not sure if you can put stocks into an RRSP.

If not, you sell then first, pay tax on the capital gains, and buy whatever you want and is allowed in the RRSP with the cash contributions; I imagine any direct deposit of stocks works this same way. You presume you sold them to the RRSP and pay capital gains tax of current market value…

Considering what a poor growth most funds, stocks, and bonds are yielding - your best bet probably is to pay off the mortgage as fast as possible. I assume the student loans are lingering because the interest rate is so low? Otherwise, why not pay them off too?

What are your relative ages and what are your retirement plans? IIRC at age 71 you have to start drawing down your RRSP. If you plan to retire early, are you hoping to supplement income with RRSP funds? Will one of you work much longer than the other? (Then the one off work should own RRSP funds to draw on). Will one of you have a good pension? That used to matter, but with pension splitting it is less of an issue. One of you going to take a few years off to look after kids?

5

Yes, we do expect her income to go up substantially in the next couple years, however there will be a year or two of potentially very lean times when she does a fellowship, which could require us to move, potentially to another country, where I couldn’t work. In general fellowships are very low paid.

Our goal, this year, (we think at least - that is why I am asking questions) is to lower how much we pay in tax, and ensure that we are protecting the money as best we can.

Ok, perfect, so it does seem like we should have money in these things, and should max it out.

[QUOTE=md2000]
You make the mortage payment, she puts money into an RRSP - or vice versa… who cares?
[/QUOTE]

This is true, and we are aware that its our money. I made it “her” and “mine” because its prior to marriage money,and I wasn’t sure if this made any tax differences.

Student loan has very low interest rate, and its tax deductible so it is not our priority. The mortgage is not our priority because of the fellowship issues mentioned above…we have no idea where we will be in the next couple of years. We have no kids right now, we do plan on having some and it will be I who will take time off as she is the Doctor. Retirement is still 25-30 yrs off

So if I have this straight:

The 60k we have in non-registered accounts is now “ours” regardless of who’s name the account is in, and when this money was earned?

Due to it being ours, we can put into whomever’s RRSP we want, with that named person enjoying the tax benefits of a normal RRSP contribution thereby reducing their taxable income accordingly. Also, TFSA growth,and whatever is done inside a TFSA is Tax free at withdrawal, and does not count as income. In essence sheltering any growth/dividends/capital gains from any tax implications.

Sound right?

6

Hmm, if you know for sure that leaner years are coming there are strategies to effectively spread your earnings over the working/non-working years buy using RRSP contributions/withdrawals. There are potential issues involving the source of the money and I don’t even want to guess at the implications of trying it cross-border. Plus you permanently burn contribution room. So talk to a professional before even considering it.

Pretty much, though if one of you contributes to and RRSP from your current portfolio and then withdraws it in the next few years I’m not sure who the income would be attributed to.

One other thing to watch out for is there are currently-unrecoverable withholdings on US dividends on stocks/etfs/mutual funds held in a TFSA; there isn’t for funds in an RRSP. It’s not a huge issue, but something to bear in mind.

7

We don’t know for sure what the next couple years will hold, and we don’t want to make this to complicated. We do have access to professional advice, it is just not conveniently located. Fellowships usually aren’t completely unpaid, you get a measly stipend.

We would rather not withdraw from a RRSP and don’t plan on it. That is one reason we are looking into the TFSA option, however the CRA website does not answer very many questions. For the something the government pushes and wants the average citizen to use they don’t do a great job explaining it. I suppose that isn’t unusual though

currently-unrecoverable withholdings? I don’t know what that is.

Thanks for all the help The Lurker Above it has cleared up quite a few things in my mind

8

I would think that the unregistered stuff in the accounts belongs (from CRA point of view) to whomever owns the account, whoever has their SIN on the account - likely just one of you if the accounts predate the relationship. The banks will send the T-whatevers to whoever is the owner, and it goes on their taxes.

The goal is to:
-minimize taxes today by reducing the taxable income of the highest-taxed person
-minimize taxes on retirement by ensuring income is balanced.

With income splitting, the latter is not as important, except (IIRC) the RRSP / RRIF payouts can only be income-split when the spouses are over 65(? 60?) but pension plan payouts can be split at any age. Hence the warning about income planning if early retirement is in the plans.

I don’t know much about TFSA rules, but since the money is not tax-deductible and no penalty for withdrawal, it sounds more like the vehicle for planning for supplementing those child-rearing years, rather than dipping into taxable RRSP withdrawals and reducing retirement income. I assume you could be using that while still qualifying as a dependent with no income.

9

The IRS will withhold 15%(IIRC) from your US based dividends. Canada and the US have a treaty that says that this won’t happen to investments in an RRSP, but since the treaty predates TFSAs they aren’t covered yet. Unless you have a lot of US based dividends it’s a pretty minor issue and will likely change in the future.

Since your future situation is still up in the air, and you seem to want to keep things simple, a couple of TFSAs sound like your best bet. They’re certainly the most flexible. I’d keep my investments in something with pretty low volatility if I might need to spend the money in the next 2-4 years.

10

The thing is, CRA does care where the money comes from. For example, we are a single income family aside from a small amount my wife earns from my holding company for admin tasks. As a result her RRSP limit is low, but so is her marginal tax rate so there is little benefit in her contributing anything. My marginal rate is high so I put half my limit in my RRSP and half in hers as a spousal RRSP.

If my wife invests $100,000 of “our” money (which is how we view it) and earns $5,000 in dividends CRA still wants to attribute that income to the earner of the original capital. Theoretically she needs to “borrow” the capital from me and pay interest to me at the proscribed rate. This reduces her income and increases mine, which is taxable at my marginal rate

11

Hmm, this would change some things. So basically we can’t transfer any of these investments to my RRSP, and have me enjoy the tax benefits? Shoot.

Is there any mechanism for a one time gift?

12

I don’t believe so. Personally I think the rules are asinine. If you divorce it’s all common capital to split, but while you are married it is all attributed to the source.

I have a more complicated structure set up with a holding company and a family trust to make it easier to share corporate earnings but unless you run an active business I don’t think it’s practical.

13

That doesn’t make a whole lot of sense to me either, but I suppose there is no law that says the taxation system needs to be sensible or easy to navigate is there? Thanks.

I think I am going to bite the bullet and actually attempt to speak to someone at the CRA about this issue…I am not hopeful I will emerge unscathed.

14

OK, not a tax expert - but I would think that the CRA does not care where the after-tax money comes from. After all, there is no gift tax AFAIK in Canada, so you could gift your spouse $100,000.

Are you referring to who has “title” to the shares? I would think she could buy $100,000 worth of shares with no income without problems. If title to the asset/sharess are in your name, then of course you “own” the income.

(If you gift the $100,000 of assets/shares to her, not after-tax cash, then the assets are presumed to have been sold and you pay captial gains on the market value at time of transfer?)

Curious, I’ve never been in this situation. However, my wife had significantly more RRSP room than I did and we never saw anything that suggested there was a limit to where her money came from - except, obviously, once enough was added to her RRSPthat year there was no further tax refund to be had so why bother.

15

You don’t have to pay any capital gains taxes on anything in the TFSA. However, if you do an in-kind transfer into your TFSA you owe capital gains taxes on any gains that you’ve had up to the date of the transfer.

Note that you cannot claim a capital loss on anything that you transfer in-kind to your TFSA.

A spousal RRSP works backwards from how you want it to. If she contributes to your spousal RRSP, then she gets the tax reduction, not you.

No such thing as a Spousal TFSA, but I was under the impression that was because it doesn’t matter. The CRA doesn’t care about where money in a TFSA came from because you’re already paid taxes on it, so she could gift you with $5000 and you could put it in your TFSA. I’m not sure how an in-kind contribution would work in this case, though.