“The registered retirement savings plan has been the tax shelter of choice for many Canadians,” says certified financial planner Jeff Stokley of London, Ontario. “Contribution limits are high, investment earnings aren’t taxed annually, and you can grow a retirement nest egg to supplement other pension earnings.” Couples can take advantage of spousal RRSPs as a way to reduce income tax after retirement.
The spousal RRSP
A spousal RRSP works in much the same way as any other RRSP, a savings plan that’s registered with the Canada Revenue Agency.
The benefits of an RRSP include:
- an income tax reduction in the tax year you make a contribution, up to your annual contribution limit,
- investments within the RRSP can grow tax-free, as long as no funds are withdrawn,
- you have control over the investments within the RRSP to be as conservative or aggressive as you like with your investment options and,
- RRSP funds are paid out after retirement and, while this income is taxed, it’s likely at a time when you’re earning less, and therefore in a lower tax bracket.
A spousal RRSP only differs from a personal RRSP in that it’s a plan to which you can contribute but remains in your spouse’s name and under their control.
RRSP contribution limits are attached to you, not to your RRSP accounts. If your annual contribution limit is $10,000, your combined contributions to both your RRSP and your spouse’s can’t exceed $10,000 and still qualify for a deduction. For example, if you contribute $6,000 to both RRSP accounts in a tax year where your contribution limit is $10,000, you can only claim an RRSP deduction for $10,000. The remaining $2,000 will not qualify for the RRSP deduction in the current year, but you may be able to carry that amount forward to a year when you don’t use all your RRSP contribution limit. Note that your spouse can contribute her annual maximum, so with the addition of your contribution, her RRSPs can grow over her personal contribution limit.
A spousal RRSP, like all RRSPs, is targeted to create retirement income. You can withdraw from RRSPs prior to then, but that money is taxed along with any other income you have for the year. Since no tax is withheld on the RRSP withdrawal, you may face a sizable amount owning on your return. In the case of a spousal RRSP, however, your wife’s withdrawal is added to your taxable income, not hers. This presents a case where you face the risk of losing any tax advantages from the spousal plan.
There are some cases where you’re not forced to claim your wife’s withdrawal as your income. These exceptions include:
- when your contributions were made more than three years before the current year,
- when the withdrawal was made after a breakdown in the relationship between you and your spouse,
- when you or your wife aren’t residents of Canada,
- when the withdrawal is transferred directly to another retirement investment,
- if the contributor dies in the year of the withdrawal, and,
- when money is transferred to a homebuyer’s plan or used to fund post-secondary education.
References & Resources
- Jeff Stokley, CFP,CIM; Investors Group, London, Ontario
- TurboTax: Spousal RRSPs in Canada
- Canada Revenue Agency: Contributing to Your Spouse
- Canada Revenue Agency: Withdrawing From Spousal or Common-Law Partner RRSPs