Canadian tax laws allow you to put funds into either your own RRSP or a spousal RRSP. A spousal RRSP allows you to contribute money to your spouse or common-law partner’s registered retirement savings plan, up to your personal contribution limit.
Benefits of a Spousal RRSP
Income splitting:
The main objective of a spousal RRSP is to shift retirement income from the higher-income spouse to the lower-income spouse. When the lower-income spouse begins to draw on the retirement income, their lower tax rate can be helpful in managing your tax burden as a couple.
Tax deduction for a higher income spouse
A higher income spouse receives a tax deduction for contributions made in the tax year, potentially resulting in immediate tax relief. The lower-income spouse can enjoy tax-deferred growth of the shifted income.
Contributions past age 71
With your own RRSP, you can’t contribute to it after the end of the year in which you turn 71. But, if you have a younger spouse and you still have contribution room available, you can contribute to a spousal RRSP until the end of the year in which your spouse turns 71.
Spousal RRSP Rules
Contribution Room
Your ability to contribute to a spousal RRSP is based on your own contribution room. If, for example, you have $15,000 of RRSP contribution room in a year, you may contribute all or a portion of this amount to a spousal plan.
If your spouse has contribution room but you don’t, only your spouse would be able to make contributions to the spousal plan.
Example
Joey’s 2020 RRSP deduction limit is $10,000. He contributed $4,000 to his RRSP, and $6,000 to his common-law partner Ghislaine’s RRSP. Joey deducted the $4,000 he contributed to his RRSP on line 20800 of his 2020 Income Tax and Benefit Return. Although Joey contributed $6,000 to his common-law partner’s RRSP in 2020, he decided to only deduct $5,500 of this contribution on his 2020 Income Tax and Benefit Return. He used Schedule 7, RRSP, PRPP and SPP Unused Contributions,Transfers, and HBP or LLP Activities, to keep track of his RRSP contributions. He may be able to deduct the remaining $500 ($10,000 – $9,500) on a future year’s Income Tax and Benefit Return.
3-year Attribution Rule
If the annuitant withdraws funds from the Spousal RRSP within 3 years of a contribution, that amount will be added to the contributor’s taxable income in the year of the withdrawal.
Spousal RRSP Conversion
Like a regular RRSP, you can keep adding to a spousal plan until the end of the year your spouse turns 71.
RRSPs can convert into retirement income products, such as registered retirement income funds (RRIFs) or annuities, at the end of the year you turn 71. At this point, the retirement income is taxed in the lower-earning spouse’s name at his/her current tax bracket.
Contributions Made After Death
No contributions can be made to a deceased individual’s RRSP after the date of death. However, the deceased individual’s legal representative can make contributions to the surviving spouse’s or common-law partner’s RRSP in the year of death or during the first 60 days after the end of that year. Contributions made to a spouse’s or common-law partner’s RRSP can be claimed on the deceased individual’s Income Tax and Benefit Return up to that individual’s RRSP deduction limit for the year of death.
Example
Dave died in August 2020. His 2020 RRSP deduction limit is $7,000. Before he died, Dave did not contribute to either his RRSP or his wife’s RRSP for 2020. His wife Paula is 66 years of age in 2020. On Dave’s behalf, his legal representative can contribute up to $7,000 to Paula’s RRSP for 2020. The legal representative can then claim an RRSP deduction of up to $7,000 on line 20800 of Dave’s 2020 final Income Tax and Benefit Return.
RRSP Contribution Deadline for 2020
March 1, 2021 is the last day for RRSP contributions for the 2020 tax year.
Q & A:
Question:
I am new in Canada. i am just trying to understand if there is really benefit to buy RRSP or spousal RRSP. what i understand is the it is only good if you keep it for long time. but if you encash them then you will have to pay tax on it.
So please guide me if i should really even bother invest in RRSPs.
Answer:
You are right, the RRSP is a tax-deferred account, which means you contribute to it with pre-tax dollars and you’ll pay your income taxes on your withdrawals. Meanwhile, RRSP must be converted to a Registered Retirement Income Fund (RRIF) by December 31 of the year you turn 71. There are two exceptions that allow you to withdraw from your RRSP for purposes other than retirement. However, you will need to repay the amount: Home Buyers Plan (withdraw up to $35,000 for a down-payment on your first home, and repay over 15 years) and Lifelong Learning Plan ($10,000 per year to a maximum $20,000 for school, and repay over 10 years).
RRSPs are especially beneficial for Canadians in a high tax bracket. If you aren’t making much money in a given year (e.g. if you are a student), there isn’t too much point in chasing a big tax refund via an RRSP contribution. You already aren’t taxed very much, so you won’t get much of your taxes paid back. In this situation, a TSFA might be a better option.
The TFSA is more flexible and offers a better tax benefit than the RRSP, however, it doesn’t have a high contribution room. Therefore, most Canadians will have both an RRSP and a TFSA and spread out the savings across both accounts.
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