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1. Participate in an RRSP
In the situation you are asking about, Lynne, if the husband uses his income to pay into a tax-deferred account, there may not be any tax issues. For example, he may give his wife money to contribute to a Registered Retirement Benefit Plan (RRSP). But if she’s not working, and never has been, she probably doesn’t have an RRSP spot. The RRSP space comes from earned income, such as income from employment or self-employment.
However, if she had an RRSP room, the husband could give her money for a contribution with no tax implications. However, if an individual has no income, claiming an RRSP tax deduction would not be beneficial. There would be no tax savings because the person does not pay taxes.
2. Contribution to a spouse RRSP
A better option might be if the spouse made a contribution to a spouse RRSP, Lynne. He may contribute based on his RRSP room and claim a deduction from his taxable income. The account would be hers and future withdrawals would be taxable by her. This could help balance their incomes in retirement and reduce the amount of overall tax they have to pay.
If the RRSP accounts are in the husband’s name only, he can share up to 50% of his withdrawals with his wife, but only if he converts his account into a Registered Retirement Fund (RRIF) and only when he turns 65 is.
So having a spouse’s RRSP in their name could help reduce the tax on registered withdrawals before the age of 65. One caveat is that if he contributes and she takes withdrawals in the current year or the next two years, the income may be credited back to her husband, meaning it’s taxable for him. There is an exception to the attribution rules when the spousal RRSP converts to a spousal RRIF, but only if she claims the minimum disbursement.
3. Contribution to a TFSA
A spouse can safely contribute to a Tax Exempt Savings Account (TFSA) in the name of the other spouse, Lynne. TFSA space is accrued regardless of income and there is no income attribution between spouses. A couple should generally make full use of their TFSA account before investing in unregistered accounts.
4. Funding into an unregistered account using a Spousal Loan
If the husband invests his income into an unregistered account in his wife’s name, there may be tax problems. The resulting capital gains would be attributed back to him and taxed on his tax return. The only way to avoid this would be to lend his wife money at the rate prescribed by the Canada Revenue Agency (CRA). It is currently at 5%. She could invest the money and deduct the interest paid to him as an accounting fee to reduce investment income. However, at 5% it can be difficult to make a profit as she needs to earn more than 5%. The 5% interest she would pay her husband would also be taxable income, which he would report on his tax return. At current interest rates, this strategy may not make sense.
Even without taking out a loan with a prescribed interest rate, Lynne, she was able to invest the money and pay the income back to her husband. It would be taxable for him anyway. However, if she takes that income and then puts it in a separate account, the income she derives from it—known as second-generation income—would be taxable for her. It might not make much of a difference unless she invests a lot of money, but it’s better than nothing.