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Couples can open and contribute to a personal Registered Retirement Savings Plan (RRSP) or a spousal RRSP—or both. A spousal RRSP generally makes the most financial sense for couples whose incomes are quite different. If one partner earns little or no income, so that contributing to their own RRSP doesn’t offer any tax benefits, the higher-income spouse can make tax-deferred contributions to their lower-income partner’s retirement savings through a spousal RRSP.
The contributing spouse is limited by their own RRSP room, and the tax deductions are claimed on the tax return of that contributing spouse. And the contributing spouse may also save within their own individual RRSP.
The owner of the account makes the investment decisions, and the account is in their name. It’s important to note that in some provinces, individuals keep the assets in their name when they have a relationship breakdown in a common-law union. That’s because common-law partners are treated like married couples in some provinces, while in other provinces—like Ontario—it’s more of a “what’s yours is yours, and what’s mine is mine” approach, and whose name an asset is held in is generally more important for common-law partners than legally married spouses.
For example, in Ontario, if someone contributes to their common-law partner’s RRSP, they may be “giving away” money in the event of a relationship breakdown that the person would not have otherwise been entitled to receive. It gets more complicated, because the contributing partner could have a case for unjust enrichment. In other words, if someone contributed more to a joint asset or the other spouse’s asset (RRSP, house, business), there may be a case for making things even. Resolving these issues is messy in some provinces.
What are the benefits to holding spousal RRSPs?
Spousal RRSPs can be helpful for people who are saving for a first home. If one spouse has a lower income or does not work, the higher-income spouse can contribute to a spousal RRSP. The Home Buyers’ Plan (HBP) allows withdrawals of up to $35,000 to use towards the purchase of an eligible home. A spousal RRSP could allow a couple to double the potential withdrawal from $35,000 to $70,000 and get higher tax refunds on contributions. Spousal RRSP attribution rules that generally apply to withdrawals are not applicable to the HBP. (Attribution is discussed in more detail below.)
A key benefit of a spousal RRSP is that withdrawals are generally taxed to the account owner, not the contributor. If one spouse’s income or assets are higher than the other, a spousal RRSP can help equalize retirement assets and future income.
A taxpayer who is 72 or older can no longer contribute to their own RRSP—but if their spouse is 71 or younger and has a spousal RRSP, the older contributor can continue to claim tax deductions if they have existing RRSP contribution room or continue to generate new room from earned income.
Can you own a spousal RRSP and an individual RRSP?
The owner of a spousal RRSP may be able to contribute to their account themselves and claim a personal RRSP tax deduction. Despite it being a spousal RRSP, the institution where it’s registered may be able to issue a personal tax slip. This could be a simpler solution than maintaining both a spousal and a personal RRSP account.
A spousal RRSP and a personal RRSP can be combined, and a personal RRSP can be transferred on a tax-deferred basis into a spousal RRSP, but not the other way around. The result is that combining a spousal and personal RRSP always results in a spousal RRSP.
Looking at it from the other side, a spousal RRSP can be converted to a personal RRSP in the event of a relationship breakdown or upon death of the contributing spouse. Typically, the account holder must wait until no contributions have been made to the account for three years. Although this conversion is not necessary, nor does it change the taxation or ownership of the account, some people may appreciate the opportunity to remove the spousal reference.
Watch-outs to consider with spousal RRSPs
While withdrawals from spousal RRSPs are usually taxed in the hands of the account owner—the lower-income spouse—there can be situations where spousal RRSP withdrawals are taxed back to the contributor.
There is a concept called spousal RRSP attribution. If a contribution is made to a spousal RRSP in 2019, 2020, or 2021, for example, and a withdrawal is taken in 2021, the income up to the amount of the contributions may be taxed on the contributor’s tax return. The income is “attributed” back to them. This three-year rule is important to remember as a couple approaches retirement or otherwise considers RRSP withdrawals.
A spousal RRSP contribution made in January or February 2019—and reported on a 2018 tax return—is still considered to have been made in 2019 for attribution purposes if a 2021 withdrawal is taken. RRSP contributions in the first 60 days of the year get reported on the previous year’s tax return, but for spousal RRSP attribution purposes, it is the calendar year of the contribution that applies.
Another consideration is that if a spousal contribution was made to any spousal RRSP in the past three years, spousal attribution could apply to a withdrawal from another spousal RRSP. So, attribution is not based on the specific account, but applies to all spousal RRSPs owned by a taxpayer and contributed to by their spouse.
Converting a spousal RRSP to a RRIF
When a spousal RRSP is converted to a RRIF, it will remain a spousal RRIF. Attribution (see above) does not apply if only the minimum RRIF withdrawal is taken. Withdrawals that exceed the minimum may be subject to attribution, if contributions were made in the previous three years. In the year that a RRSP is converted to a RRIF, there is no minimum withdrawal required, so any withdrawals taken in that first year could be subject to attribution.
Spouses can split their income in retirement using pension income-splitting on their tax returns. Up to 50% of eligible pension income—including RRIF withdrawals—can be transferred to the other spouse when a couple files their tax returns. This legislation was introduced in 2007 and, since then, spousal RRSPs have been less beneficial.
However, only RRIF withdrawals after age 65 qualify. So, spousal RRSPs can help reduce tax for couples who retire early.
Spousal RRSPs can also be helpful for couples who have income from other sources that are not considered eligible pension income, like employment income, self-employment income, or taxable non-registered investment income.
Spousal RRSPs can be helpful tools for couples if contributions are made, and withdrawals are taken, strategically. Although pension income-splitting may provide sufficient income equalization in retirement for some couples, spousal RRSPs can provide more flexibility, especially for those who retire prior to age 65.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
Great article and awesome tips!
Question: my understanding is that Personal RRSP cannot be transferred to spousal RRSP as per government website, are you referring to a specific situation in your article (i.e. upon death of the contributing spouse)? Then shouldn’t that also apply to transferring a spousal RRSP to personal RRSP upon death of the spouse if the contributor is still alive?
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