How Does a Spousal RRSP Work?

Spousal RRSP

A spousal RRSP account allows one spouse to contribute to their spouse, common-law partner, or same-sex partner’s registered spousal RRSP account. Setting up a spousal RRSP can be an effective method of income splitting to help couples reduce their household tax payable.

Who Owns the Spousal RRSP Account?

The spousal RRSP account belongs to the registered named spouse of the account. The contribution made into a spousal RRSP account belongs to the registered spouse and is the property of the registered spouse.

How to Set Up a Spousal RRSP

A Spousal RRSP account can be set up through most financial institutions. You can also set up the account on your own through your brokerage account.

How Much can you Contribute to a Spousal RRSP?

The spousal contribution room is based on the contributing spouse’s RRSP room. The spouse receiving the contributions does not need to earn an income or have an RRSP contribution room to set up a spousal RRSP. A contributing spouse may contribute all their RRSP room to the spousal RRSP or split the contribution between their RRSP and the spousal RRSP. The total contribution cannot exceed their RRSP contribution room.

Spousal RRSP contribution does not impact the spouse’s contribution room who is the registered owner of the spousal RRSP, even if they are working and have their own RRSP contribution room.

Who Pays the Taxes on Spousal RRSP?

Contributions made into a spousal RRSP have attribution rules. When a contribution is made, the funds will need to stay in the account for the remaining of the contributing year plus two calendar years.

Spousal RRSP Amount Year Contribution Made Year Attribution Rule Expires
$5,000 2019 2022

Effectively, the contributed funds must remain in the account for three years. If not, the funds withdrawn will be attributed to the spouse who contributed the funds when withdrawn.

The attribution rules are based on a last-in, first-out (LIFO). This principle means that the most recent funds contributed are the first funds that must go out.

Spousal RRSP Amount Year LIFO Rule
$5,000 2018 Last-Out
$4,000 2019 Third-Out
$3,000 2020 Second-Out
$5,000 2021 First-Out

If a registered owner of a spousal RRSP decided to withdraw $5,000 from their account in 2021, those funds would be attributed back to their contributing spouse to pay taxes on that amount due to attribution rules around the spousal RRSP withdrawals.

It’s possible to avoid spousal RRSP attribution rules if one of the following applies upon withdrawal;

  • There’s a break-down in the marriage
  • Contributing spouse died in the year funds were withdrawn
  • One or both of the spouse was a non-resident of Canada when funds were withdrawn

If none of these apply, then attribution rules will apply to the withdrawn funds.

Who Claims the Spousal RRSP Contributions?

Spousal RRSP contributions are based on the contributing spouse’s RRSP room; therefore, the spouse contributing can claim an RRSP deduction. The receiving spouse cannot claim an RRSP contribution for the spousal RRSP contribution, but the funds can continue to grow tax-free until withdrawn.

What Happens to Spousal RRSP Fund if you Divorce or Separate?

In the event of a marriage break-down or separation, there would be no attribution rule with withdraws made to the account. The owner of the spousal account will have to pay taxes for any amount they withdraw from the account.

What Type of Investment can you have in a Spousal RRSP?

The type of investment that can be held in a spousal RRSP is similar to those that can be held in a regular RRSP account. As such the following investments can be held within a spousal RRSP;

  • Bonds
  • GIC
  • Stocks of a publicly traded company
  • ETF or Index funds
  • Mortgages or pools of mortgages that are secured by real estate located in Canada
  • Foreign government bonds
  • Cash
  • Mutual funds
  • Banker’s acceptance
  • Investment grade gold and silver bullion coins and bars

If it can be held in a regular RRSP account, it can also be held with a spousal RRSP account.

What Investments Cannot be Held in a Spousal RRSP?

The list of investments that cannot be held in a spousal RRSP is shorter than those that can be held in an RRSP. The following investments cannot be held within a spousal RRSP;

  • Commodity and financial future contracts
  • Listed personal property (arts, jewellery, etc)
  • Uncovered Options (including call and put)
  • Real Estate (though you can own an ETF REIT)
  • Shares and debt of a private corporation

Do Spousal RRSP qualify for the First Time Home Buyer Program?

Yes, assuming you meet the program’s qualification requirement. However, there are some things you first need to determine before pulling out the fund. The first thing you need to consider is the attribution rules mentioned earlier.

Recall that spousal RRSP contributions have to stay within the account for at least 3 calendar years. Therefore, if the funds within the spousal RRSP haven’t met this rule, if they are pulled out they would be attributed back to the contributor.

However, if attribution rules are not applicable and the spouse who owns the spousal RRSP meets the first-time home buyer program requirement, these funds can be pulled to be used towards the program. As such, each spouse would be able to pull up to $35,000 from their RRSP and spousal RRSP from their respective account types.

Can you use Spousal RRSP funds for the Lifelong Learning Plan?

You can use spousal RRSP funds towards the Lifelong Learning Plan assuming you meet the program’s requirements.

The first thing to confirm with spousal RRSP withdrawals is attribution rules. You need to first ensure that the funds being pulled will not be attributed back to the contributing spouse. Assuming no attribution rules apply then the spouse with the spousal RRSP could use the fund from their account to be used towards the Lifelong Learning Plan.

Is a Spousal RRSP a good Idea?

Spousal RRSPs are a good tool for reducing a household’s overall taxes by allowing couples to implement an income-splitting strategy. However, recent rule changes have made it possible for couples to split most pensions up to 50%, which might reduce the need for a spousal RRSP account.

Spousal RRSP is still a good account to consider for couples who perhaps have no pension income other than their savings, with one spouse earning a much higher income than the other. The higher-income spouse can still get an RRSP tax deduction to reduce their current tax payable income while helping the lower-income spouse build up retirement income to withdraw at retirement at a lower tax rate.

The overall taxes paid by the household will be less than if the high-income spouse claimed all the income in their name.

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