What is a Spousal RRSP?

A spousal RRSP is a registered retirement savings plan that names your spouse as the "annuitant" — or owner — of the plan, even though you might be making the contributions.

The main objective of a spousal RRSP is to shift retirement income from the higher-income spouse to the lower-income spouse. When the lower-income spouse begins to draw on the retirement income, their lower tax rate can be helpful in managing your tax burden as a couple. At the same time, the tax deduction on contributions made by the higher-income spouse may allow for more immediate tax relief.

A spouse includes common-law partners of the same or opposite sex as well as legally married spouses.

Benefits of a Spousal RRSP

Here are the main reasons a spousal RRSP might be a suitable choice:

Tax deduction for a higher income spouse

A higher income spouse receives a tax deduction for contributions made in the tax year, potentially resulting in immediate tax relief.

Tax deferred growth from qualified investments for the lower income spouse

The lower-income spouse can enjoy tax-deferred growth of the shifted income.

Income balancing

Contributing to a spousal RRSP can help to equalize your retirement income as a couple and lower your household income tax at retirement. This can happen when the lower-income spouse withdraws the funds at a lower marginal tax rate.

Contributions past age 71

With your own RRSP, you can't contribute to it after the end of the year in which you turn 71. But, if you have a younger spouse and you still have contribution room available, you can contribute to a spousal RRSP until the end of the year in which your spouse turns 71.

Contribution room

Your ability to contribute to a spousal RRSP is based on your own contribution room. If, for example, you have $15,000 of RRSP contribution room in a year, you may contribute all or a portion of this amount to a spousal plan.

If your spouse has contribution room but you don't, only your spouse would be able to make contributions to the spousal plan.

Attribution rules on withdrawals

If you contribute funds to a spousal RRSP and your spouse withdraws funds from the plan — or from any other spousal RRSP — either during the year you made the contribution or in the following two calendar years, you will have to pay the tax on the money withdrawn at your tax rate. The amount attributed back to you (the spousal contributor) for tax purposes only applies to this three-year period.

Let's look at an example:

Let's say you contributed $30,000 four years ago to your spouse's RRSP and $5,000 in the last calendar year.

• if your spouse withdraws $7,500 this year, $5,000 of that will be taxed as part of your income, since you contributed that money in one of the last two calendar years
• the remaining $2,500 would be taxed as part of your spouse's income.

Other considerations

• If either spouse dies, the attribution rules no longer apply.
• Attribution does not apply if, at the time of the withdrawal, you or your spouse were non-residents of Canada or were living separate and apart by reason of the breakdown of your marriage (or common-law relationship).
• Closing the plan and withdrawing all of the funds may trigger attribution (taxes attributed to the spousal contributor).
• Converting the RRSP to a RRIF does not trigger attribution tax, provided only the minimum amount is withdrawn in the next two calendar years.

If you're preparing for retirement and are focused on creating tax efficiencies, you might be interested in Preparing for Retirement? Focus on Tax Efficiency.

Spousal RRSP Conversion

At the end of the calendar year in which the plan owner (annuitant) turns 71, the spousal RRSP must be collapsed. You can then begin drawing from your retirement income by looking at options such as a spousal RRIF.

For more information about spousal RRSPs, visit the Canada Revenue Agency website at www.canada.ca.

The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.