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Benefits of a Spousal RRSP

Erica Szczech - Jan 05, 2021
If you have a spouse/common-law partner, a spousal RRSP may provide an opportunity to income split if they are expected to be in a lower tax bracket later on.

Over the years, the federal government has eliminated many income-splitting opportunities available to investors. However if you have a spouse/common-law partner, a spousal RRSP may provide a valuable opportunity if your spouse is expected to be in a lower tax bracket in retirement.

A Tax Break Now... A Tax Break Later

A Spousal RRSP is a plan to which you contribute and receive tax deductions based on your available contribution room, similar to a traditional RRSP. However, the difference with a spousal RRSP is that your spouse is the annuitant, so any funds withdrawn are considered your spouse's income and must be included in their income tax return. As such, withdrawn funds will be taxed at a lower rate should your spouse pay tax at a lower rate than you.

Be aware that income attribution rules apply to a spousal RRSP. In general, your spouse must wait three years after your last RRSP contribution before making a withdrawal. Otherwise, some or all of the RRSP withdrawal would be taxed in your hands.

Greater Flexibility Than Pension Income Splitting?

A spousal RRSP may provide an enhanced opportunity when compared to pension income splitting. Pension income splitting can only be done after reaching the age of 65 and is limited to 50 percent of eligible income. A spousal RRSP can begin before age 65 and the full amount of RRSP income may be included in the spouse's tax return. However, RRSP contributions can only be made until age 71. If you have a younger spouse, you can contributed to a spousal RRSP until the spouse reaches age 71.

For assistance with this, or other RRSP matters, please call our office.