Spousal RRSP in Canada: What You Need to Know

Dec 1

Planning for retirement requires smart financial strategies, especially for couples looking to minimize taxes and maximize savings. One effective tool available to Canadians is the Spousal Registered Retirement Savings Plan (Spousal RRSP). This government-designed account helps couples balance retirement income, reducing their overall tax burden when they start withdrawing funds.

In this article, we’ll cover what a Spousal RRSP is, why it was introduced, who can benefit from it, how it works, the withdrawal rules, and some frequently asked questions.

What Is a Spousal RRSP?

A Spousal RRSP is a type of Registered Retirement Savings Plan (RRSP) designed to help couples save for retirement while allowing for income splitting in the future. In a traditional RRSP, the person contributing to the plan is also the owner of the account. However, with a Spousal RRSP, one spouse (the “contributing spouse”) makes contributions to an RRSP in the name of the other spouse (the “annuitant spouse”). The contributing spouse gets the tax deduction, while the annuitant spouse will eventually withdraw the funds in retirement.

This strategy helps even out retirement income, especially when one spouse earns significantly more than the other, leading to tax advantages in the future.

Why Was the Spousal RRSP Created?

The Canadian government introduced Spousal RRSPs to promote financial equality among couples and encourage income splitting in retirement. Since Canada’s tax system is progressive (meaning higher incomes are taxed at higher rates), this tool allows couples to reduce their overall tax liability by shifting taxable income to the lower-earning spouse when they retire.

Without a Spousal RRSP, the higher-earning spouse may accumulate most of the retirement savings, potentially resulting in higher taxes upon withdrawal. A Spousal RRSP spreads the retirement income more evenly, leading to lower overall tax rates for the couple.

Who Can Open and Contribute to a Spousal RRSP?

✔ Eligibility: Any married or common-law couple can open a Spousal RRSP. The key requirement is that both individuals are Canadian residents.

✔ Who Contributes? The higher-income spouse (contributor) makes deposits into the RRSP, and the lower-income spouse (annuitant) owns the account.

✔ Who Gets the Tax Deduction? The contributing spouse claims the RRSP tax deduction, helping to reduce their taxable income.

✔ Who Withdraws the Funds? The annuitant spouse withdraws funds in retirement, ideally at a lower tax rate.

How Does a Spousal RRSP Work?

A Spousal RRSP functions similarly to a regular RRSP but has some unique advantages:

✔ Tax Deduction for Contributions – The contributing spouse gets an immediate tax deduction for deposits made into the Spousal RRSP, reducing their taxable income.

✔ Tax-Deferred Growth – Investments inside the RRSP grow tax-free until withdrawal.

✔ Income Splitting at Retirement – The lower-income spouse can withdraw funds in retirement at a lower tax bracket, reducing the couple’s overall tax bill.

Example Scenario:

Spouse A earns $120,000 per year, and Spouse B earns $40,000 per year.
Instead of only contributing to their own RRSP, Spouse A contributes $10,000 into a Spousal RRSP for Spouse B.
Spouse A gets the $10,000 tax deduction today, lowering their taxable income.
In retirement, Spouse B withdraws the money at a lower tax rate, saving the couple money on taxes.

Rules and Withdrawal Guidelines

Contribution Rules

✔ Contributions to a Spousal RRSP count toward the contributing spouse’s RRSP limit (not the annuitant spouse’s).

✔ The maximum contribution is based on the contributing spouse’s RRSP deduction limit, which can be found on their Notice of Assessment from the CRA.

Withdrawal Rules

✔ Three-Year Attribution Rule

If the annuitant spouse withdraws from the Spousal RRSP within three years of the last contribution, the withdrawn amount is taxed back to the contributing spouse, defeating the purpose of tax splitting.
To avoid this, wait at least three calendar years before making withdrawals.

✔ Retirement Withdrawals

After the three-year period, withdrawals are taxed in the annuitant spouse’s name, likely at a lower tax rate, reducing the couple’s overall taxes.

✔ RRIF Conversion

By the end of the year the annuitant spouse turns 71, the Spousal RRSP must be converted into a Registered Retirement Income Fund (RRIF) or an annuity, and minimum withdrawals must begin.

✔ Withdrawals Before Retirement

Early withdrawals are possible but will be taxed at the annuitant spouse’s tax rate (or the contributing spouse’s rate if within three years).
Withholding tax applies: 10% (up to $5,000), 20% ($5,001–$15,000), and 30% (over $15,000).

Frequently Asked Questions (FAQs)

1. Can both spouses contribute to a Spousal RRSP?

No. Only the contributing spouse can make contributions, and it counts toward their RRSP limit. The annuitant spouse cannot contribute to the Spousal RRSP but can have their own personal RRSP.

2. What happens if the couple separates or divorces?

A Spousal RRSP remains in the annuitant spouse’s name even if the couple separates. However, during divorce proceedings, it may be considered an asset and subject to division.

3. Can I still contribute to a Spousal RRSP if I have a workplace pension?

Yes, but your RRSP deduction limit may be affected by your pension adjustment. Check your CRA Notice of Assessment for your available RRSP room.

4. How is a Spousal RRSP different from pension income splitting?

A Spousal RRSP allows income splitting before retirement, while pension income splitting only applies once withdrawals begin in retirement. The Spousal RRSP provides more control and flexibility.

5. Can the contributing spouse withdraw money from the Spousal RRSP?

No. Only the annuitant spouse (the one whose name is on the account) can make withdrawals.

A Spousal RRSP is a powerful tool for couples who want to lower their tax burden in retirement. If one spouse earns significantly more than the other, this strategy evens out income distribution and leads to tax savings.

At Upsurge Financial Services Inc., we specialize in helping Canadian families create personalized financial plans, including retirement strategies like Spousal RRSPs. If you have questions or want to know how this can fit into your overall retirement planning, reach out to us today!

This article provides general information only and should not be considered legal, financial, or professional advice. You should consult a qualified professional for guidance tailored to your specific situation. While the information presented is believed to be accurate and up to date, its completeness and reliability are not guaranteed. The views expressed are those of the author(s) as of the date of publication and may change without notice. No endorsement of any third parties, their advice, opinions, products, or services is given or implied by Upsurge Financial Services Inc. or its affiliates.