What Is a Spousal RRSP and How Does It Work?

A Spousal Registered Retirement Savings Plan (RRSP) is a retirement savings vehicle for couples in Canada. It allows spouses or common-law partners to save for retirement while potentially reducing their overall tax burden.

Defining the Spousal RRSP

A Spousal RRSP is structured for two individuals: a contributor spouse and an annuitant spouse. The contributor spouse deposits money into the plan, which is held in the name of the annuitant spouse. This setup differs from a standard individual RRSP, which is owned and contributed to by the same person.

In this arrangement, the contributor spouse claims the tax deduction for the contributions made, benefiting from an immediate tax reduction. The annuitant spouse owns the plan and its funds, controlling investment decisions. They will receive the income generated from the plan during retirement.

The primary purpose of a Spousal RRSP is to facilitate income splitting in retirement, leading to a lower overall tax liability for the couple. This strategy is beneficial when there is a notable income disparity between spouses during their working years. By moving income from a higher-earning spouse to a lower-earning spouse, the couple can benefit from both spouses being in lower tax brackets during retirement.

This mechanism helps to equalize retirement savings between partners, ensuring both individuals have similar incomes when they cease working. Unlike pension income splitting, Spousal RRSPs offer flexibility and can be used at any age to build retirement savings. Once contributions are made, the funds legally belong to the annuitant spouse, who has sole control over withdrawals and investment choices.

Contributing to a Spousal RRSP

Contributions to a Spousal RRSP use the contributor spouse’s available RRSP deduction limit. This means the amount contributed reduces the contributor’s personal RRSP contribution room, not the annuitant spouse’s. The contributor spouse claims the tax deduction for these contributions on their annual income tax return.

The total amount contributed to both a personal RRSP and a Spousal RRSP cannot exceed the contributor spouse’s annual RRSP deduction limit. This limit is determined by the Canada Revenue Agency (CRA) and is generally 18% of the previous year’s earned income, up to a maximum dollar amount, plus any unused contribution room carried forward. For instance, the maximum RRSP contribution limit for 2025 is $32,490.

Contributions can be made throughout the year, but to claim a deduction for a specific tax year, they must be made by the first 60 days of the following calendar year. For example, contributions for the 2024 tax year must be made by March 3, 2025. Contributions can continue to be made to a Spousal RRSP even if the contributor spouse is over 71, provided the annuitant spouse is 71 or younger. However, contributions to any RRSP cease for the annuitant at the end of the year they turn 71.

Withdrawing from a Spousal RRSP

Withdrawing funds from a Spousal RRSP involves specific rules, particularly the “three-year attribution rule,” designed to prevent immediate income shifting for tax avoidance. If the annuitant spouse withdraws funds within the calendar year of a contribution or in the two subsequent calendar years, the withdrawn amount will be attributed back to the contributor spouse and taxed in their hands. This means the contributor, who likely has a higher income, will pay the tax on that withdrawal. This rule aims to ensure that Spousal RRSPs are used for long-term retirement savings and not as a short-term income-splitting tool. If a withdrawal occurs within the attribution period, the contributor is taxed on the amount up to their contributions made during that period.

For example, if a contribution is made in 2025, any withdrawals by the annuitant spouse before the end of 2028 would trigger this rule.

Exceptions where the attribution rule does not apply include:
The death of either spouse.
The breakdown of the marriage or common-law partnership.
If either spouse becomes a non-resident of Canada.
Withdrawals made under the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP).

Once the three-year attribution period has passed, or if an exception applies, withdrawals from the Spousal RRSP are taxed in the hands of the annuitant spouse as ordinary income. This is the intended outcome, allowing the couple to benefit from the annuitant spouse’s potentially lower tax bracket in retirement. Like individual RRSPs, a Spousal RRSP must be converted into a Registered Retirement Income Fund (RRIF) or used to purchase an annuity by December 31 of the year the annuitant turns 71. Minimum withdrawals from the RRIF become mandatory in the year following its establishment.