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Should You Have a Spousal RRSP?

By Michael Callahan | May 11, 2021

A spousal RRSP is not just for retirement planning – it can also be a great tax planning tool. Given the high level of taxation in Canada, tax savings should always be a priority for Canadian investors. Proper tax planning involves making the most of any potential tax savings strategies available to you.

First and foremost, although the official terminology indicates “spousal RRSP,” the rules regarding spousal RRSPs are equally applicable to common-law partners. As such, if you’re married, or have a common-law partner, a spousal RRSP may present a powerful tax strategy for you.

For simplicity, we’ll use the term spouse throughout this article.

How it Works

Although the RRSP is generally intended as a retirement savings account, a spousal RRSP in particular is essentially an income‑splitting tool within that context. A spousal RRSP is best understood as a 2-step process, and works as follows:

  1. First, one spouse contributes to the spousal RRSP. This spouse receives the income tax deduction, just as if they had contributed to their own RRSP.
  2. Second, the other spouse eventually withdraws the funds from the RRSP. It is this spouse who is then taxed on the RRSP withdrawal.

Notice that one spouse gets the deduction upon contribution, but never pays tax on the withdrawal – it is the other spouse pays the taxes upon withdrawal. That might sound totally unfair, but that’s the whole point. The strategy works when the spouses or partners have significantly different incomes, and therefore are in different marginal tax rates. Remember, the key outcome of this strategy is balancing incomes in retirement. Therefore, it’s not necessarily the difference in your current incomes that matters, but the difference in your retirement incomes that matters. Indeed, this is the determining factor when deciding whether or not a spousal RRSP makes sense for you.

Let’s illustrate with an example where a spousal RRSP is used to help a couple not only save for retirement, but also save taxes too.

Spousal RRSP – Who’s Who

Let’s clarify some terminology for the key people involved in a spousal RRSPs:

  • Annuitant – the annuitant is the spouse who owns the spousal RRSP account. It is therefore the annuitant who makes the investment decisions, and who eventually withdraws the money from the spousal RRSP. Typically, this is the spouse with the lower income.
  • Contributor – the contributor is the spouse who makes contributions to the spousal RRSP account. When a contribution is made to a spousal RRSP, it is the contributing spouse who receives the corresponding income tax deduction. Typically, this is the spouse with the higher income.

Example – Dave and Sandra

Dave and Sandra are married, and live in the province of British Columbia. They have a son with special needs. Sandra is well-paid corporate executive. As the Chief Financial Officer of a credit union, Sandra has a great salary and benefits plan, and earns an annual salary of $185,000. She is a member of the company’s pension plan, and is on track to have a great pension in retirement. Additionally, Sandra contributes the maximum to CPP each year, and therefore expects to receive the maximum CPP retirement benefit in retirement.

In order to take care of their son, Dave has not pursued a career. He does some carpentry projects for friends and relatives, but earns very little income. Dave has very little retirement savings, and given that he isn’t working, has no pension and makes no CPP contributions.

Due to his lack of income, Dave has no RRSP contribution room. On the other hand, Sandra has an RRSP contribution limit of $25,000 this year. What should they do?

The Strategy

In our example, the strategy is fairly straightforward – Sandra should contribute to Dave’s spousal RRSP.

 Given that Sandra has a lucrative employer pension, and is expected to receive the maximum CPP retirement pension as well, all RRSP savings can be directed towards building Dave’s retirement income. Since Dave has neither the income nor the RRSP contribution room available to contribute to his own RRSP, this strategy allows Dave to accumulate RRSP savings, while Sandra claims the deduction for her contributions, and therefore achieves a meaningful tax savings in the current year.

In our example, Dave is the annuitant, and Sandra is the contributor. It is therefore Sandra who makes the contribution to the account, and receives the corresponding income tax deduction.

On the other hand, Dave owns the spousal RRSP, and is the one who eventually makes the withdrawals from the account.

Spousal RRSP – The Mechanics

It’s important to understand how RRSP contribution room is affected when using a spousal RRSP. Note that it is the contributor’s RRSP contribution room that determines how much can be contributed to the account. Also, it is the contributor’s RRSP contribution room that is impacted. The RRSP contribution limit of the annuitant who actually owns the account is irrelevant.

In our example, Sandra contributes to Dave’s spousal RRSP. Therefore, it is Sandra’s RRSP contribution limit that governs how much can be contributed to the account, and Sandra’s limit that is reduced according when she makes the contribution. Although he is the owner of the spousal RRSP account, there is no impact whatsoever to Dave’s RRSP contribution limit. The fact that he actually has no contribution room available does not matter.

Note, also, that the maximum amount Sandra can contribute to any RRSP is governed by her limit. That is, Sandra cannot contribute $25,000 to her own RRSP and also contribute $25,000 to Dave’s RRSP. Of course, she can contribute lesser amounts to both her own RRSP and Dave’s spousal RRSP. But she can only deduct a maximum of $25,000, regardless of which RRSP(s) she contributes to.

Bottom Line

Depending on your own unique circumstances, it may be more effective for you to contribute to a spousal RRSP than to your own RRSP. If you’re wondering whether or not a spousal RRSP makes sense in your case, we can help you crunch the numbers and make an informed decision. If you would like to have a discussion with a Portfolio Manager or Certified Financial Planner, just contact us.

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Michael Callahan