How does a spousal RRSP withdrawal work?

by Ann deBruyn

A man sits in his kitchen, looking at his RRSP statements on his laptop.

Photo by Nataliya Vaitkevich from Pexels

I bought a spousal RRSP in December 2019 and I plan to withdraw from it this week. Is it considered to be my income or my spousal income? I called CRA four times, but no one could answer this question for me. —Tom

Spousal RRSP withdrawal rules: Timing matters 

Tom, the rules around the timing of spousal registered retirement savings plans (RRSPs) can be confusing. If you don’t time the withdrawal correctly it may be taxed in your name rather than your spouse’s name, which is not what you want.

Let me see if I can clear this up for you and then I’ll give you some ideas on why a spousal RRSP is a good income splitting tool.

To answer your question, when you make a spousal RRSP contribution you have to wait two full calendar years, with no contributions, before you can make a withdrawal that is taxed in your spouse’s hands.

In your case, Tom, you made a contribution in Dec. 2019. You didn’t make a contribution in 2020 or 2021 which means if your spouse draws from the spousal account in 2022, he/she will be taxed on the withdrawal, not you as the contributor.

Just to confuse things, has anyone ever told you that you have to wait three years before you can draw from a spousal RRSP? This is the safe answer. Let me explain.

If you had made the contribution in January 2020, just one month later, you would have to wait until 2023 before the withdrawal would be taxed in your spouse’s name.

A contribution was made in 2020, so you can’t include that year as one of the two years of no contributions, so you would have to wait out 2021 and 2022 before making the withdrawal in 2023. 

You may be wondering, if you have been making regular contributions to a spousal RRSP over the last 10 years, can your spouse withdraw money you put in 10 years ago? The answer is no, if you are still contributing to the plan. The two years of not contributing is always based on the last contribution, not the first one.

Setting up a spousal RRSP at one institution and stopping your contributions for two years so you can draw funds from that spousal RRSP while contributing to a spousal RRSP at a different institution isn’t going to work either. The Canada Revenue Agency (CRA) is smarter than that.

With those explanations you should have a good understanding of how the timing works on spousal RRSPs, but do you know how to use them effectively?

Remember, a spousal RRSP offers income splitting opportunities. If you and your spouse have the same taxable income, then you likely wouldn’t use a spousal RRSP but if your taxable incomes are different then consider the use of a spousal RRSP.

Basically, spousal RRSPs work like this. The higher income earning spouse makes a contribution into a spousal RRSP. The maximum allowable contribution is based on the contributor’s RRSP contribution room.

After waiting the two calendar years with no contributions to the RRSP your spouse, the owner of the account, can withdraw funds and will be taxed at their lower tax rate, not the contributor’s higher tax rate. 

How a spousal RRSP works

You might be wondering about the value of a spousal RRSP if you can split pension income. Here are a few ideas. 

Early retirement or disability

Income from a RRIF before age 65 does not qualify as pension income that can be split with a spouse. If your spouse stops working or becomes disabled before age 65, having a spousal RRSP gives them an option to make withdrawals at a potentially very low tax rate.

When you make a spousal RRSP contribution for this reason it is best to make the contributions in December rather then the first 60 days of the new year. If a spouse becomes disabled you will still have to wait the two years before withdrawals are taxed at their rate, but it is better than waiting three years if you contribute in the first 60 days of a new year.

The Home Buyer’s Plan (HBP) 

Assuming a high income spouse and a low income or non-working spouse, it may not make sense for the low income/non-working spouse to contribute to a RRSP. A high income earning spouse can contribute to their RRSP and a spousal RRSP to maximize the Home Buyer’s Plan (HBP). In other words, rather than having $70,000 in one individual RRSP, in which only $35,000 can be drawn for the HBP, there would be $35,000 in an individual RRSP and $35,000 in a spousal RRSP and both of those amounts can be drawn for the HBP.

In addition, when it comes time to repay the HBP the spouse with little or no income may decide not to repay the money. If they have little or no income then there will be little or no tax to pay if the repayment is not made. 

RRSP contributions after age 71

If you still have RRSP contribution room after age 71 or if you are still working and earning contribution room then you can add money to a spousal RRSP if your spouse is under age 72. 

The bottom line

Tom, I know it can be a little confusing so thanks for asking this question as I am sure you are not the only one wondering how spousal RRSP withdrawals work. 

Allan Norman, M.Sc., CFP, CIM, RWM, is a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached at atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is intended for Canadian residents only.

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