If you are married or have a common-law partner, you can take advantage of the spousal registered retirement savings plan (RRSP) to minimize your tax burden.
Spousal RRSPs are beneficial when one party is in a higher tax bracket than the other party. When contributing to a spousal RRSP, most people get confused about whose RRSP contribution limit applies.
It’s pretty straightforward — if you have a spousal RRSP, you and your spouse or common-law partner can contribute to it.
You must have an available RRSP contribution room if you contribute to the spousal RRSP. Likewise, your spouse or common-law partner must have an available RRSP contribution room if they contribute to the spousal RRSP.
Whoever contributes to the spousal RRSP gets the RRSP tax deduction benefit based on their contributions and marginal tax rate. So if your spouse has a higher tax bracket, they can get more tax breaks (deferred taxes) by contributing to your spousal RRSP, and vice versa.
Even more interesting is that when you can no longer contribute to your RRSP due to age restrictions —being older than 71, you can contribute to your spouse’s RRSP and get the RRSP deduction benefit.
When it comes to reporting income on withdrawals, here’s how it works.
Generally, only the person who owns the RRSP can withdraw from it. In fact, the RRSP issuer will issue the tax slip in the RRSP annuitant’s name (owner of RRSP).
However, when it comes to who pays the taxes on the withdrawal, this could be you or your spouse.
If your spouse contributed to your spousal RRSP, the Canada Revenue Agency (CRA) considers their contributions in the two preceding years from the year you make a withdrawal to determine who pays tax on the withdrawal.
For example, if your spouse contributed $10,000 to your spousal RRSP in 2020, and you withdraw $5,000 from your spousal RRSP in 2022, your spouse will include $5,000 in their income for 2022 taxes.
If you withdraw another $5,000 in 2023, you will include this amount in your income, not your spouse’s, for 2023 taxes. This is because the year 2020, in which your spouse contributed to the spousal RRSP, exceeds two preceding years from 2023.
The Canadian government introduced RRSPs for retirement savings, so if your spouse’s contributions to your spousal RRSP stay in the plan until retirement, the CRA will tax your withdrawals using your marginal tax rate.
In the event of death, you cannot contribute to a deceased spouse or common-law partner’s spousal RRSP. On the flip side, the legal representative of a deceased person can make contributions on their behalf to their spouse or common-law partners’ RRSP within a specified time.
The allowable time to make contributions on behalf of a deceased person to their spouse’s RRSP is the year of death or the first 60 days from the end of the death year.
Finding legitimate ways to reduce your taxes, such as using a spousal RRSP, may appear daunting but could benefit you and your family when done right.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
