RRSP 202: How does Spousal RRSP Work?

Key Takeaways

• Spousal RRSPs reduce the overall tax paid for the entire household by splitting income between spouses.
• The key to maximizing the benefits of a Spousal RRSP lies in a significant income disparity between the spouses.
• It is essential to grasp the attribution rules and steer clear of short-term withdrawals to avoid incurring additional tax obligations.

In family financial planning, a spouse’s Registered Retirement Savings Plan (RRSP) is a highly effective tool. It can efficiently split income, thereby reducing the overall tax paid for the entire household. This article will delve into the principles and some important tax regulations related to a spouse’s RRSP, helping you better utilize this plan.

What is a Spousal RRSP?

The Spousal RRSP is a type of Registered Retirement Savings Plan designed to transfer income from the higher-earning spouse to the lower-earning spouse, creating a more balanced income for both partners.

In Canada, individual income taxes are calculated based on personal income rather than household income. Therefore, when there is a significant income disparity between spouses, the total tax liability for a couple with disparate incomes may be higher than that of a couple with similar incomes, even if their total household income is the same.

To address this issue, utilizing a Spousal RRSP allows for income splitting, helping to reduce the overall tax burden for the entire household by distributing income between spouses.

Differences Between Individual RRSP and Spousal RRSP?

The primary distinction between Individual RRSPs and Spousal RRSPs lies in the contributor and account holder. For Individual RRSPs, the contributor and account holder are the same individual—you contribute to and own your own RRSP account. On the other hand, with Spousal RRSPs, the contributor is generally the higher-earning spouse, while the account holder is the lower-earning spouse. It’s important to note that the contributor has no control over the Spousal RRSP account; investment and withdrawal decisions are solely at the discretion of the account holder.

How to Maximize Spousal RRSP Benefits?

The greater the income disparity between spouses, the more significant the benefits of a Spousal RRSP. If both spouses have very similar incomes, especially within the same tax bracket, the Spousal RRSP might not result in more tax savings compared to an Individual RRSP. In other words, the Spousal RRSP is most tax-efficient when there is a difference in income between spouses, particularly when they fall into different tax brackets. Otherwise, the advantage of utilizing a Spousal RRSP may not be as pronounced.

How to Open a Spousal RRSP Account?

Step 1: Confirm RRSP Contribution Room
Given that the Spousal RRSP is typically funded by the higher-earning spouse, it is essential for the contributor to confirm they have adequate contribution room to avoid penalties for over-contributions.

Step 2: Open the Spousal RRSP Account
When setting up a Spousal RRSP account, the account holder should be the lower-earning spouse, while the contributor should be the higher-earning spouse.

Step 3: Tax Reporting
During the tax filing process, the contributor can utilize the receipt from the Spousal RRSP to reduce their own income for the contribution year, thereby taking advantage of potential tax benefits.

Spousal RRSP Withdrawal Considerations: Attribution Rule

Due to the tax advantages of income splitting provided by Spousal RRSPs, the government has implemented a “3-year Attribution Rule” to prevent short-term exploitation of this plan.

• If the account holder of a Spousal RRSP withdraws contributions within 3 years, the withdrawn amount will be attributed to the contributor’s income for the withdrawal year.
• If the account holder withdraws contributions after 3 years, and no new contributions were made within that period, the withdrawn amount will be attributed to the account holder’s income for the withdrawal year.

For further details on the CRA’s regulations regarding the Attribution Rule for Spousal RRSPs, you can visit their website.

Tips: How to Withdraw Funds Earlier from a Spousal RRSP Account?

The 3-year Attribution Rule for Spousal RRSPs is based on three calendar years, not three complete years. For instance, if a contributor makes a contribution to a Spousal RRSP on December 31, 2023, and does not make any additional contributions in 2024 and 2025, the beneficiary can withdraw funds earliest on January 1, 2026. The withdrawn amount will be attributed to the account holder’s income for the withdrawal year.

If the contribution is made on January 1, 2024, and no additional contributions are made in 2025 and 2026, the account holder can withdraw funds earliest on January 1, 2027, with the withdrawn amount attributed to the account holder’s income for the withdrawal year.

Although the contribution dates are only one day apart, the withdrawal date gets delayed by a year. Therefore, if you want to withdraw funds from a Spousal RRSP account as soon as possible without being subject to Attribution Rule, consider making contributions before the end of the calendar year.

After deciding to invest in a Spousal RRSP, the next step is to choose suitable investments. In RPSP 104, we will explore how to select appropriate financial products based on your risk tolerance.

For more RRSP-related articles, please visit our RRSP Registered Retirement Savings Plan Guide.

Last Updated: February 14, 2024
Published Date: February 29, 2020

This article and all content on apexlife.ca site provide information of a general nature and do not address the circumstances of any particular individual or entity. Nothing on the site constitutes professional, legal, tax, investment, financial, insurance, or other advice. Please review the detailed disclaimer and copyright statement.