Like a traditional RRSP, a spousal RRSP allows you to defer taxes, giving your investments more time to grow. However, it is also a retirement planning strategy that can help couples reduce the taxes they pay in retirement.
What Is a Spousal RRSP?
A spousal RRSP is an RRSP that is owned by one spouse but funded by contributions from the other spouse. The account owner controls the investments and generally receives any withdrawals from the account, considering certain attribution rules.
The spouse making the contribution uses their own RRSP contribution room and receives the tax deduction – same as a normal RRSP. The contribution does not use the account owner’s RRSP room.
Who Can Open a Spousal RRSP?
Anyone who is eligible to open a regular RRSP can typically open a spousal RRSP, provided they have a spouse or common-law partner.
Like a regular RRSP, a spousal RRSP can be opened at most financial institutions and can hold a wide range of qualified investments.
Why Use a Spousal RRSP?
The main goal of a spousal RRSP is to help reduce taxes in the future.
If one spouse earns substantially more retirement income, the couple may end up paying more tax. A spousal RRSP helps address this by increasing retirement assets for the lower-income spouse. Withdrawals can then be spread more evenly between spouses, potentially reducing the combined tax bill.
A lower-income spouse may also generate less RRSP room so a spousal RRSP helps offset this.
Who Should Consider Using a Spousal RRSP?
A spousal RRSP may be worth considering if:
- One spouse earns significantly more than the other.
- One spouse is expected to accumulate much more savings.
- One spouse has a sizeable workplace pension.
- You plan to retire before age 65.
The larger the expected difference in retirement income, the greater the potential benefit of shifting future income to the lower-income spouse.
How Does a Spousal RRSP Help Reduce Taxes?
The primary benefit of a spousal RRSP is that it helps balance retirement income between spouses.
Suppose one spouse retires with a large RRSP balance and other investment income, while the other spouse has a relatively modest pension. Without planning, much of the retirement income will be taxed in the higher-income spouse’s hands, pushing them into higher tax brackets while the other spouse is in a lower tax bracket.
Had some of the higher-income spouse’s RRSP contributions been directed to a spousal RRSP, a greater portion of the couple’s retirement income could be received by the lower-income spouse. This may reduce the couple’s combined tax bill by allowing more of their retirement income to be taxed at lower tax rates.
Does Age Have an Impact on the Strategy?
Yes. The benefit of a spousal RRSP often depends on when you expect to begin drawing retirement income.
The strategy can be particularly valuable for couples who plan to retire before age 65. Prior to age 65, withdrawals from a RRIF do not qualify for pension income splitting. A spousal RRSP can help shift some of the retirement income to the lower-income spouse, reducing the combined tax bill during the years before RRIF income splitting becomes available.
At age 65, withdrawals from a RRIF are typically eligible for income-splitting. As a result, the advantage of a spousal RRSP is often less significant after age 65. However, it can still provide valuable flexibility in certain scenarios. For example, if one spouse also receives significant dividend income, they may still find themselves in a much higher tax bracket than the other spouse, even after income-splitting.
Example
Consider a couple, Alex and Taylor, who both retire at age 60. They decide to delay CPP and OAS until age 70 to maximize their lifetime benefits. During the five years before age 65, they plan to fund their lifestyle by withdrawing $140,000 per year from their RRSPs.
If Alex accumulated most of the family’s retirement savings in his own RRSP, they may have little choice but to withdraw most of the funds each year from his RRSP. However, if Alex had directed some of his RRSP contributions to a spousal RRSP for Taylor over the years, those withdrawals could instead be shared more evenly between both of them.
Without a Spousal RRSP
Alex | Taylor | |
Annual RRSP Withdrawal | $120,000 | $20,000 |
Approx. Average Tax Rate | 23.4% | 2.8% |
Approx. Annual Income Tax | $28,100 | $550 |
Combined Annual Income Tax | $28,650 | |
With a Spousal RRSP
Alex | Taylor | |
Annual RRSP Withdrawal | $70,000 | $70,000 |
Approx. Average Tax Rate | 18% | 18% |
Approx. Annual Income Tax | $12,500 | $12,500 |
Combined Annual Income Tax | $25,000 | |
By spreading the same $140,000 of annual retirement income evenly between spouses, the couple could reduce their combined income tax by approximately $3,650 per year. Over the five years before age 65, this could result in approximately $18,250 of cumulative tax savings without changing their lifestyle or the amount they withdraw from their retirement savings.
*Results are approximate and for illustrative purposes only.
What Is the Three-Year Attribution Rule?
The three-year attribution rule is one of the most important rules to understand before contributing to a spousal RRSP. This is because it can determine which spouse pays tax on withdrawals.
The rule looks at how much has been contributed to any spousal RRSP during the year of withdrawal and the previous two calendar years. If contributions were made during that period, some or all of the withdrawal may be taxed back to the contributing spouse instead of the account owner.
Example
- Alex contributed $10,000 in 2022, 2023 and 2024 to Taylor’s spousal RRSP.
- No contributions were made in 2025 or 2026.
- If $10,000 is withdrawn in 2026, it may still be taxed back to Alex because there was a contribution in 2024.
- Beginning in 2027, withdrawals would generally be taxed to Taylor.
The important point is that the rule operates on a rolling basis. Each new spousal RRSP contribution effectively extends the attribution period. Couples who plan to begin drawing on a spousal RRSP should stop making contributions several years beforehand so withdrawals are taxed to the lower-income spouse as intended.
Can a Spousal RRSP Help Reduce OAS Clawback?
Yes, but the impact is generally more limited because of income-splitting.
Old Age Security (OAS) benefits are subject to a recovery tax once an individual’s income exceeds the annual clawback threshold. Because the clawback is calculated on an individual basis rather than household income, concentrating retirement income in one spouse’s name can increase the likelihood of losing some or all of their OAS benefits.
By helping to balance retirement income between spouses, a spousal RRSP may reduce the likelihood that one spouse exceeds the clawback threshold.
What Happens When You Convert a Spousal RRSP to a Spousal RRIF?
Just like a RRSP is converted to a RRIF, a spousal RRSP is converted into a spousal RRIF. The account ownership does not change. The spouse who owns the spousal RRSP continues to own the spousal RRIF and receives the withdrawals. Minimum withdrawal amounts are the same as a RRIF.
The attribution rules can continue to apply to withdrawal amounts above the minimum spousal RRIF withdrawal. However, the minimum spousal RRIF withdrawal is generally exempt from attribution.
What Are the Drawbacks of a Spousal RRSP?
While a spousal RRSP can be an effective long-term tax planning strategy, there are a few drawbacks.
Your Retirement Income May Change
A spousal RRSP works best when one spouse is expected to have higher retirement income than the other. However, circumstances can change. A lower-income spouse may later receive promotions, build a successful business, or accumulate significant assets, ultimately becoming the higher-income spouse in retirement. If that happens, a spousal RRSP that was opened earlier could concentrate more retirement income in the now higher-income spouse.
The Three-Year Attribution Rule
Withdrawals made during the year of contribution or the following two calendar years may be taxed back to the contributing spouse rather than the account owner. This can reduce the intended tax benefit if the funds are needed sooner than expected.
There May Be No Benefit After Age 65
Once a spouse reaches age 65, RRIF withdrawals generally qualify for pension income splitting. For couples who expect to retire after age 65, this can reduce or eliminate the benefit of a spousal RRSP.
It Can Increase Complexity
A spousal RRSP adds another layer to retirement planning. Couples need to consider the attribution rules, expected retirement income, and whether contributions to a spousal RRSP should continue as their circumstances evolve.
Is It Time to Consider a Spousal RRSP?
A spousal RRSP can be an effective way for couples to reduce lifetime taxes and create greater flexibility in retirement. However, its value depends on factors such as your current incomes, expected retirement income, retirement age, and overall financial goals.
For some couples, the strategy can produce meaningful tax savings over the course of retirement. For others, regular RRSPs may be sufficient. The key is understanding how today’s contribution decisions may affect your retirement income in the future.
At Hemisphere Capital Management, we help clients evaluate wealth strategies and withdrawal plans to determine whether a spousal RRSP fits with their retirement goals.
FAQs
The spouse who makes the contribution receives the tax deduction.
No. Contributions to a spousal RRSP use the contributor’s RRSP contribution room, not the account owner’s. The spouse who owns the account does not need to have RRSP contribution room available.
There is no specific age at which you should start contributing to a spousal RRSP. The decision depends on whether you expect one spouse to have significantly higher retirement income than the other. Ideally, the goal is to enter retirement with a similar amount of retirement assets in each spouse’s name. If you expect to begin drawing on the account shortly after retirement, remember that the three-year attribution rule means contributions made in the years immediately before retirement may reduce the intended tax benefits.
Yes, provided your spouse is younger than age 71. A spouse over age 71 may still be able to contribute to a younger spouse’s spousal RRSP if they still have their own RRSP contribution room. This can be done until December 31 of the year the younger spouse turns 71.
Yes. Each spouse can own a spousal RRSP funded by contributions from the other spouse, although this is less common.