Spousal RRSP - Is It for You?

A spousal RRSP is a special account set up solely in the name of an individual whose spouse is also named as a registered payer (a contributor) of tax-deductible contributions. The contributor gets the tax deduction, but the contributor's benefit stops there. The spouse is the legal owner of the plan and, as such, makes all the investment decisions or withdrawals. The owner can withdraw fund from the account and pay income tax on his/her marginal rate. It is supposed that this rate is lower than the contributor’s rate.

One of the few income-splitting opportunities available to couples – spousal RRSPs makes sense when one spouse expects to have a lower income in retirement or child-rearing years. A family with an annual income of $70,000 taxed in the hands of one spouse would pay taxes of $25,000, for example, but split that income equally between them and the tax bill drops to $20,500.

You can contribute to a spousal RRSP up to your annual RRSP contribution limit. If you have a contribution limit of $7,500, for example, your combined contributions to your own RRSP and the spousal RRSP can't be more than $7,500. And your contributions don't lower your spouse's contribution limit to his or her own RRSP.

How you split your contribution amount is up to you. Each spouse may contribute up to 100 per cent of their available annual contribution limit into spousal RRSP, as well as any remaining room into their individual RSP accounts. It may be appropriate for the spouse, who has a generous pension, to make most or all his contributions to a spousal plan; even if that means the non-pension spouse ends up with more RRSP assets.

There are a few restrictions, however, that unless understood at the outset, can hinder the tax-effectiveness of a spousal plan. To prevent abuse, Canada Revenue Agency has strict "attribution" rules concerning early withdrawals.

If a spouse makes a withdrawal from a spousal RRSP in the current calendar year and either of you has contributed to the plan in the current year or in the two preceding years, the amount of the withdrawal — up to the amount contributed during this period — is added to your taxable income. Only if no contributions were made to any spousal plans in the year of withdrawal and in the two preceding years, would your spouse be liable for any income tax on the withdrawal.

The word "any" is particularly important here. A withdrawal from a spousal RRSP, to which no contributions were made during the three-year period, will still be attributed to your income if, over that three-year period, contributions were made to other spousal plans, regardless of when they were set up or where they are held.

So if your spouse makes a withdrawal from the spousal RRSP held at Manulife Insurance Company, to which you've made no contribution since it was set up five years ago, all or part of that money your spouse withdrew would be considered part of your taxable income if you contributed to a spousal RRSP held at RBC Dominion Securities Inc. in the last year.

Note also the term "calendar year." Making a contribution in January 2019 would mean your spouse must wait until January 2022 before a withdrawal would no longer have any tax impact. A contribution made in December 2018, however, would allow your spouse to make a withdrawal as early as January 2021, in other words in the third year after the year when the contribution was made.