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Note that with a spousal RRSP, you can effectively have all of your RRSP/RRIF withdrawals taxed in your spouse’s or partner’s name, whereas with pension-income splitting, you are limited to 50 per cent of RRIF withdrawals.

Spousal income splitting

If your spouse or partner is in a lower tax bracket than you, consider a prescribed rate loan strategy whereby the funds are loaned to your spouse or partner to invest. Provided you charge at least one per cent on the loan (the current prescribed CRA interest rate until at least March 31, 2018), you can income split any excess returns.

The advantage of setting up this loan when the prescribed rate is one per cent is that the Income Tax Act only requires you to use the prescribed rate at the time the loan was granted. In other words, if you make a demand loan to your spouse today, you can use the one per cent rate for the duration of the loan, which could be many years or decades. The only caveat is that the interest on the loan must be paid by Jan. 30 annually, otherwise the strategy falls apart for 2018 and all future tax years.

Here’s how the income splitting strategy works, using an example of Rob, who is in the top tax bracket, and his partner, Katy, who is in the lowest bracket. Let’s say Rob loans Katy $300,000 at the current prescribed rate of one per cent secured by a promissory note. Katy invests the money in a portfolio of Canadian dividend-paying stocks with a current yield of four per cent. Each year, she takes $3,000 of the $12,000 in dividends she receives to pay the one per cent interest on the loan to Rob.