Can I Get the Maximum Family Tax Cut If My Lower Income Partner Contributes More to a RRSP?

A question came up recently on RedFlagDeals from someone looking to the future and trying to improve their tax refund in 2016 for their 2015 taxes.  The person said that when he and his wife did their tax returns for 2014, they received some of the Family Tax Cut, but not the maximum of $2 000 per family. His wife is working and has unused RRSP room but is in a low tax bracket and therefore they haven’t bothered to have her contribute much to her RRSP. He wanted to know, if his wife contributed to her RRSP in 2015, would it increase their Family Tax Cut to the maximum of $2 000; I wasn’t sure so I ran some test cases to see if he could get the maximum by having his lower income partner put more into her RRSP.

What Is the Family Tax Cut Based On?

If you look at Schedule 1-A you’ll see that the Family Tax Cut is calculated using your taxable income from line 260 of your return. Line 260 occurs after your income is adjusted for any RRSP contributions.

In this question, the person wants to know if the lower-income spouse should reduce their income even further by contributing to their personal RRSP to get the highest possible Family Tax Cut.

The arithmetic answer is Yes. By contributing to their personal RRSP, the person making the least money can increase the amount that can be used for the “paper” transfer from the higher income person to the lower, and therefore they can maximize their Family Tax Cut up to the limit of $2 000.

Can Everyone Benefit With a Higher Family Tax Cut By Contributing More to a RRSP?

No.

  • Some families are already receiving the maximum $2 000 family tax cut. Changing RRSP contributions will not increase the amount.
  • In some families the two incomes are very similar. Although a RRSP contribution might increase the Family Tax Cut, it may not increase it significantly. If this situation applies to you, you might want to test the benefit yourself using free tax software for 2014 from StudioTax or GenuTax Standard. Try adding the increased RRSP contribution to the lower income spouse’s return and then check Schedule 1-A to see what, if anything, changed with the Family Tax Cut.
  • In some families, the lower income earner does not have any RRSP room. (For example, they might only have investment income.) Without personal RRSP room they cannot change the Family Tax Cut calculation.

NOTE: Contributions to a Spousal RRSP by the higher paid person for the benefit of the lower paid person do NOT increase the Family Tax Cut.

What Is the Possible Downside of Having the Lower Income Partner Contribute More to a RRSP?

It’s important to also look at this from a long-term tax perspective.

If the lower earning partner does not make much money, they will not get much of a tax refund for their RRSP contribution if they claim the deduction immediately. (And they must claim the deduction to get the higher Family Tax Cut.)

Then, when they eventually withdraw the money from the RRSP either in retirement or for an emergency, they will have to add the amount to their taxable income at that time.

This could mean they will pay tax at a higher rate on the RRSP money when they take it out than they received back as a refund and as a benefit from increasing the Family Tax Cut when they put it in.

For example, say someone has an income of $20 000 and contributes $5 000 to a RRSP in order to maximize the Family Tax Cut. In the test case I ran, that person received a tax refund of about $1 215 and increased their Family Tax Cut by $323.

Now suppose when she retires she is receiving

  • $8 000 a year in CPP,
  • $6 000 a year in OAS, and
  • $40 000 a year from a pension and investments.

If she takes out $5 000 from her RRSP, she will owe $11 498 in tax if she lives in Ontario, based on the 2014 tax rates.

If she doesn’t withdraw the $5000 her income tax is only $9 940.

Her tax increase is $1 558.

She is paying $20 more in tax than she saved. That’s not a very large amount, fortunately.

She will also have to pay income tax, however, on any investment income and capital gains generated by that $5 000 while it was in her RRSP when she withdraws the money from her RRSP or RRIF.

The calculation of whether it’s a good idea can get very messy:

  • What will the tax brackets and rates be when she withdraws the money from her RRSP/RRIF?
  • How much has inflation increased between when she saves the money and when she has to pay the income tax on the withdrawal?
  • Will the family invest the money saved using the Family Tax Cut and if so, what return will it generate to offset the future tax liability?

I can’t simply say that it’s a good idea or not to make a RRSP contribution to maximize the Family Tax Cut. It will depend on too many factors. You should consider some of the possibilities, though, before deciding how to best use your money.

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Have you tried to optimize your Family Tax Cut by tinkering with RRSP contributions? Are you one of the majority of Canadians who doesn’t benefit from this Cut so you don’t care? Please share your views with a comment.

You Think You’re Fine for Retirement But What Happens If Your Partner Dies Will You Still Have Enough Income? Part 2: Personal Savings (RRSP, RRIF, TFSA, Annuity) Retirement Income

Many articles in the newspaper that check families “Retirement Readiness” do not seem to check what would happen if one partner of a couple dies unexpectedly young. The articles always summarize the income of the two people without accounting for whether pensions and various sources of income will stop prematurely if (or when) one of the two dies. Retirement books, however, are quick to point out we should all check not only our retirement plan as a couple, but our retirement plan as a sole survivor. In this series, I’m looking at how different sources of retirement income change or stay the same when one partner of a couple dies. I’m curious whether my husband, or I, will be ok in retirement if one of us dies; Here, I’m checking what would happen to our retirement income from personal savings such as RRSPs, RRIFs, TFSAs and annuities.

What Happens to RRSP and RRIF Income for Your Surviving Partner If You Die?

Fortunately, one type of income does not automatically drop just because a partner dies. If the partner is married or common-law, then the government will allow RRSPs and RRIFs to be transferred to the partner tax-free if the partner is the designated beneficiary.

To be clear, for a tax-free transfer from one spouse to another, the pair must be married or in a common-law relationship as defined by the Canada Revenue Agency.

In most cases, it is necessary for the partner to be declared as the beneficiary of the RRSP or as the successor annuitant of the RRIF at the institution where the assets are held. For example, you can declare the beneficiary of your RRSP using a form from Tangerine which is mailed back to Tangerine.

It is sometimes possible to safely move the assets to the partner if they are the declared beneficiary or successor annuitant in the will but this is NOT the preferred method. It is possible the RRSPs and RRIFs would have to be cashed out and taxes paid before the money is distributed. Don’t risk it.

For married and common-law spouses, RRSPs and RRIFs can be “rolled over” intact to the surviving partner. The survivor can continue to keep the money inside the RRSPs and/or RRIFs and the assets can continue to grow tax free. For RRIFs (and RRSPs) the money must be withdrawn on the same schedule and at the same percentages as withdrawals must be made from the survivor’s own RRSPs or RRIFs.

So my husband and I can include the same expected income from our RRSPs and RRIFS in retirement whether we are together or alone. We have designated each other as the beneficiaries to our registered plans. When we open a RRIF later, we will be sure to designate each other as the successor annuitants.

What Happens to TFSA Income For Your Surviving Partner If You Die?

For TFSAs in most locations in Canada instead of being declared the beneficiary, the partner should be identified as the Successor Holder. Again, there is a form available from the financial institution hosting the TFSA which you should sign and submit to the bank, credit union or other institution.

For married and common-law spouses, the TFSA can be “rolled over” intact to the surviving partner if they have been identified as the Successor Holder on the form from the financial institution before the death. The survivor can keep the TFSA intact and any assets inside the TFSA can continue to grow tax free. It’s as if the successor account holder has received more TFSA room. There is no requirement to withdraw money from a TFSA but it can be withdrawn as desired for income.

This means my husband and I can rely on our TFSA income in retirement whether we are both alive or if one of us has died unexpectedly young. We have designated each other as the Successor Holders for our TFSAs.

Other Income Considerations for RRSP/RRIFs and TFSAs for the Surviving Partner

Although registered investments can be transferred safely to a survivor there are some other things to think about and plan for before it’s too late.

Who Will Manage the RRSP/RRIF and TFSA Assets to Generate Income?

One other factor needs to be considered, though, if assuming that RRSP/RRIF and TFSA income will remain the same for the surviving partner: Can the surviving partner manage the assets to produce the expected income?

In some families, one spouse does all of the financial work. They choose and monitor investments, rebalance portfolios, deal with various financial institutions and manage the paperwork.

If one partner is not capable of managing the money the same way the deceased partner used to then the income from RRIFs and TFSAs could be at risk.

Financial successes like Warren Buffet plan for “succession.” That’s just a polite way of phrasing they plan for their own death. If you know your partner (or you!) won’t be able to manage the money properly, you should plan for that. Interview professionals and find someone who can take over the money work when it becomes necessary in the future. Update the plan periodically and keep the information handy. You’ll both be more comfortable if this is dealt with long before it’s necessary.

Right now either of us could continue to manage our investments if one of us were to die. We need to keep reviewing this regularly, however, in case either of us suffers from a cognitive decline in the future. (We really don’t want the person with dementia picking the investments!)

Ensure You Have Appropriate Powers of Attorney In Place NOW

(If you haven’t already, you should also set up Powers of Attorney that include financial matters. Anyone at any age can suffer an unexpected disaster that renders them unable to continue to handle the family money. Don’t leave your partner, your family and yourself at risk. Get your POAs done; discuss your POAs with your financial institutions; use a lawyer, as appropriate, to set them up properly.

We have our POAs although I want to review them and if necessary update them as they are several years old.

What Will Happen to OAS and GIS Payments When One Partner Holds All the RRSP/RRIF Assets?

Another change that could reduce the income of the surviving partner is less obvious but needs to be considered. Married and legally common-law couples can split their pension income and each person has a fairly high personal exemption on their income tax.

Once one partner has died, however, these benefits vanish.

This can put other sources of pension income at risk.

Old Age Security, OAS, payments are reduced if a person’s total income exceeds the allowable annual amount. In 2014, the maximum income a person could have before losing some of their OAS income was $71 592. The amount of OAS payable is gradually reduced as the person’s total income increases. In 2015, a person with $112 966 of income in 2014 would receive no OAS.

Guaranteed Income Supplement, GIS, payments are also reduced based on income. A widowed person receiving $17 088 of other income in 2014 would not receive any GIS payments in 2015.

It’s important to remember that the mandatory annual RRIF withdrawals are considered “income.” So if a person dies and leaves their RRIF to their partner, that partner will be responsible for making the annual RRIF withdrawals and for reporting that amount on their income tax.

The increased RRIF income may be enough to reduce the amount of OAS or GIS paid to the survivor.

While it is usually still better to “rollover” the RRIFs to the survivor, it is worth checking the math to make sure this is the best decision. And it’s best to understand ahead of time whether OAS or GIS payments may drop.

At this point, neither of us expects to be eligible for GIS, we hope. We would be eligible for OAS so we need to do the math to see what would happen to our OAS payments if one of us died unexpectedly young while our RRSP/RRIFs still had high balances.

Understand What Annuity Income to Expect After the Death of One Partner

Some people also have personal retirement income from an annuity. When planning for the worst, it’s important to understand the exact terms of the annuity.

  • Will the annuity continue to make income payments to the surviving partner?
  • Will the amount stay the same or be reduced?
  • Does the annuity continue to pay income to the survivor but only for a certain number of months or years?

Many annuities will stop entirely once the person who purchased them dies. Check the details and fine print on any contracts to make an accurate retirement income plan for the survivor.

At this point, we don’t have any annuities so this will not affect my husband or my own retirement plans, at least not yet.

What Will Happen to Your Government Retirement Income When One Partner Dies?
In the third section, we’ll look at what may happen to other sources of retirement income such as the CPP, OAS and GIS if one partner dies.

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Have you done the math and read the paperwork to find out what the income will be for you and your partner together, and each of you alone? Was it a sobering, frightening exercise to look at the survivor plans? Please share your experiences with a comment.