How a spousal RRSP can save couples tax

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Can I contribute to both a spousal RRSP and RRSP or does it have to be one or the other? Does the same RRSP deduction apply to the spousal RRSP and the RRSP? For example, if I have $10,000 in RRSP contribution room can I contribute $10,000 to my Spousal RRSP and $10,000 to my RRSP? Please clarify this for me.
—Doug

Hi Doug. Yes, you can contribute to your registered retirement savings plan (RRSP), your spouse’s RRSP, or any combination of the two, but no, you can’t double up your contributions. To clarify, if you have $10,000 of RRSP contribution room, that is all you have. You can’t invest $10,000 into your RRSP and $10,000 into a spousal RRSP and claim a $20,000 RRSP contribution deduction.

Spousal RRSPs don’t seem to be as popular as they once were before pension splitting was introduced in 2007, but they are still a worthy consideration in retirement planning. An SRRSP is one of the simplest ways for most people to income split with a spouse to save tax.

Our government taxes individual income and not household income. This, combined with a progressive tax system—increasing tax rates as income increases—encourages people to find ways to shift income to lower-earning spouses.

To appreciate the tax difference, consider a one-income household in Ontario earning $150,000 a year. The tax owing is about $40,100 which leaves them $109,900. A two-income household with two earners making $75,000 per year each pay a total of about $26,600, leaving them with $123,400.

It’s the same household income but an additional $13,500 of spending money for the two-income family earning the same amount of money as the single-income household. After age 65, the difference could be even larger when you consider Old Age Security (OAS) clawback and the age credit. This is why high income earners want to shift some of their taxable income to their spouse with a lower income or no income. A SRRSP is a great way to do this.

Unique benefits of a spousal RRSP

I am going to review how an SRRSP works, how to recognize when it makes sense, and how to use it strategically. Once you have a basic understanding of SRRSPs you may even come up with your own strategies.

Anyone with RRSP contribution room can contribute to their own RRSP until the end of the year they turn 71, and to a spousal RRSP until the end of the year their spouse turns 71, regardless of the contributor’s own age. With an SRRSP you get the tax deduction and your spouse gets the money. The contribution doesn’t affect your spouse’s RRSP contribution room, allowing them to contribute to their own RRSP as well.

Withdrawing from a SRRSP can get tricky, though. You must wait two full calendar years after the last deposit to any SRRSP before all the withdrawal is taxed in your spouse’s name. If a withdrawal is made within the two calendar years, the contributor will be taxed on it, except for a minimum withdrawal from a spousal registered retirement income fund (RRIF).

An example will make this easier to understand. If you contribute to an SRRSP on December 31, 2026 you must wait until January 1, 2029—two years and one day—before a withdrawal can be taxed in your spouse’s name.

Conversely, if you made that deposit on the next day, January 1, 2027, you must wait until at least January 1, 2030, (three years) before withdrawals are taxed in your spouse’s name. Remember, when making SRRSP contributions, make them before the year-end instead of in the first 60 days of the new year.

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Mind the waiting periods

As I touched on earlier, the common exception to the two- or three-year waiting period is a minimum RRIF withdrawal which is taxed in the spouse’s name, but this is also tricky. If you convert your SRRSP to a SRRIF within the two-year window, any withdrawals you make in the year the RRIF is set up will be taxable to the contributor. Why? Because there’s no mandatory minimum withdrawal in the year a RRIF is set up. The minimum only starts the following calendar year. Therefore, when setting up a SRRIF or your own RRIF, do it anytime in the calendar year before you plan to draw money.

Another obvious but maybe less observed benefit of an SRRSP as compared to pension splitting is that 100% of the money in the SRRSP belongs to your spouse. With pension splitting only 50% of your pension can be split. With an SRRSP you can shift more money to your spouse.

Those are the main basics and with that understanding you can probably already see how SRRSPs can be used to shift income. Here are some thoughts on how to use a SPRRSP:

Start an SRRSP early, build it up and then stop contributing so the attribution window clears. When you stop contributing to the spousal RRSP, make contributions to your own RRSP. You may never have a need to withdraw from the SRRSP until retirement, but situations may come up when having a SRRSP comes in handy, such as early retirement and planned low-income periods.

Situations when a spousal RRSP shines

Pension splitting from a RRSP isn’t permitted until the year you turn 65 and convert your RRSP to a RRIF. If you are planning to retire before age 65 and use RRSP savings, then having a spousal RRSP will help you to equalize incomes and potentially save tax. The same goes if your spouse takes time off work and has a low-income year. You might draw from the SRRSP or convert it to a SRRIF and draw the minimum, knowing you can always convert the SRRIF back to a SRRSP up to the year they turn 71.

Couples with an age gap can also make good use of a spousal RRSP. If you’re the higher-earning and older spouse and you only contribute to your own RRSP, you must start withdrawals the year you turn 72. If, instead, that money is in a spousal RRSP, withdrawals are based on your spouse’s age, not yours. With a 10-year age gap, that means withdrawals wouldn’t have to start until your spouse turns 72, the year you turn 82.

In addition, if you have RRSP contribution room even after age 71, you can still make contributions to a SRRSP until the year your spouse turns 71.

Finally, a spousal RRSP shifts income that a higher earner can’t otherwise shift. You may have a holding company and be unable to pay dividends to your spouse before age 65 because of the tax on split income (TOSI) rules. It could be someone has a large non-registered dividend stock portfolio. More commonly, it could be that they have a defined-benefit pension plan, which you can pension split before age 65, but they still want to have some money in the hands of the lower-earning spouse.

Doug, spousal RRSPs can be a fantastic income-splitting tool that can be used for a number of different reasons, and I suspect they are underused. It is worth taking a few minutes to look at your current plan, on your own or with a planner, to see how a spousal RRSP might fit.