For one reason or another, I’ve been getting emails regarding the same topic, basically discussing a potential spousal RRSP loophole.
What is a spousal RRSP? It’s almost self explanatory; it’s where one spouse contributes to a separate RRSP account called a spousal RRSP in the name of their spouse. The advantage is when one spouse makes significantly more than the other. The higher income spouse can contribute to the lower income spouses RRSP while taking the higher tax deduction and help even out income/taxation during retirement. More details on how spousal RRSP’s work.
Having explained the basics, what is the loophole in question? Here is what the reader emailed me:
- step 1, contribute only to your spousal rrsp every year until you reach a
target amount $x which would last y years if withdrawing $z (ie basic
personal amount) every year until your retirement.
- step 2, for the next 3 years only contribute to your rrsp or tfsa
- step 3 start taking out from spousal rrsp $z amount and then immediately
contribute $z to your rrsp. but still contribute what you normally do on
your rrsp or tfsa. This would effectively split your incomes a little before
- step 4 at retirement convert your rrsp into rrif and it can now be split
however you want.
Technically speaking, this process would help reduce taxation as there would be a tax deduction twice on the same contribution, but does it comply with CRA rules? As I’m not a tax professional, I decided to ping my accountant colleagues/friends to see what they thought.
According to Tax Guy
Now in the specific scenario you provided (the lower income spouse withdraws, gifts to the higher income spouse who contributes to their own RRSP) may run afoul of the General Anti-Avoidance Rules (GAAR). Essentially these rules are as follows:
- The series of transactions that involve a tax benefit. In my opinion the benefit is to for the higher income earner to take a tax deduction that they would not have otherwise taken.
- The transaction is an avoidance transaction. In other words, the transaction cannot be said to “have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain tax benefit.”
- Abusiveness. The transaction is not in accordance with the “object, spirit and purpose” of the particular ITA subsection. The purpose of the RRSP deduction is to encourage saving for retirement. The fact that there is the spousal rule attributing income in the two-year period, would appear to make the transaction abusive.
According to Ed Rempel:
The attribution rules don’t apply to RRSPs or TFSAs. Either spouse can contribute to each others plans. They only apply to non-registered investments and income.
To my knowledge, it has never been tested. GAAR is not used often, so I would doubt that CRA would look at that. They would not have a good case for GAAR either, since you could just say that you contributed at the time with the intent to keep it and then needed the money a few years later. They would have to provide evidence that this was an entire pre-planned scheme.
It seems that there are mixed reviews about the strategy, so tread at your own risk. For you tax pros out there, what are your thoughts?