Spousal RRSP: Contribution & Withdrawal Rules

“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.

RRSP contributions stop after age 71, though you can contribute to a younger spouse’s/ common-law partner plan.

The Spousal RRSP

A spousal Registered Retirement Savings Plan works in much the same way as any other RRSP. 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.

Benefits of a Spousal RRSP Include:

Spousal RRSP Contribution Limits

RRSP contribution limits are attached to you, not to your RRSP accounts.

• Your combined contributions to both your own RRSP and your spouse’s cannot exceed your annual contribution limit and still qualify for a deduction.
• Any amount over the limit will not qualify for a deduction.

For example: If you contribute $6,000 to your RRSP account and another $6,000 to your spouse’s RRSP account 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.

Note: The penalties for over-contributing to your RRSP can really add up over time. If you over-contribute within the $2000 buffer, there is no penalty. But if you contribute more than your limit plus the $2000 buffer, there is a 1% per month penalty that starts the month of the over-contribution.

Early Withdrawals From a Spousal RRSP

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 early withdrawal is added to your taxable income, not theirs. This presents a case where you face the risk of losing any tax advantages from the spousal plan. Early withdrawals include the current year and three preceding years.

For example: If you have contributed $1,000 in your spouse’s RRSP for the past 10 years, and your spouse withdrew $6,000 this year, they will receive a T4RSP slip indicating the income amount, the tax deducted, the name of the contributor (which is you), and your Social Insurance Number.

Although you have only contributed $1,000 this year in the spousal RRSP, this year’s and the prior 3 years’ contributions add up to $4,000 which you will have to report as income.

The remaining $2,000 has matured beyond the 3 preceding years, so your spouse will have to claim as income on their tax return.

Withdrawal Exceptions for Spousal RRSPs

There are some cases where you’re not forced to claim your spouse’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
• when money is transferred to a home buyer’s plan or used to fund post-secondary education

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References & Resources

• Jeff Stokley, CFP,CIM; Investors Group, London, Ontario
• Canada Revenue Agency: Contributing to Your Spouse
• Canada Revenue Agency: Withdrawing From Spousal or Common-Law Partner RRSPs