How spousal RRSPs can reduce taxes without getting you in trouble

Spousal

registered retirement savings plans

(RRSPs) have been around for decades, and for many couples, these plans can play an important role in reducing tax upon retirement. But, they can be complicated, and it’s important to understand how they work and when they are most appropriately used in retirement. Let’s review the contribution rules, and then look at a few of the most common reasons for using spousal RRSPs.

A spousal (or common-law partner) RRSP is an RRSP where one spouse has contributed and claims the corresponding tax deduction, and the other spouse is the annuitant or owner of the plan. It is often used by spouses to accomplish post-retirement income splitting, as withdrawn funds are taxed in the hands of the annuitant spouse instead of the contributor spouse. If the annuitant spouse is in a lower tax bracket than the contributor spouse in the year of withdrawal, there may be an absolute and permanent tax savings.

Be mindful, however, of the three-year attribution rule for spousal RRSPs meant to prevent short-term income splitting. That rule says that if funds are withdrawn from a spousal RRSP within three calendar years of the most recent contribution, the withdrawal is taxed in the hands of the contributing spouse, not the annuitant spouse (with a few limited exceptions.)

The amount you can contribute to your RRSP or a spousal RRSP is based on your RRSP contribution limit and has nothing to do with your spouse’s unused RRSP room. Indeed, spouses may not have any RRSP room at all. If they do, however, have their own contribution room, they can make their own contribution regardless of any spousal contributions made in their name.

Sound confusing? It can be, as evidenced by an inquiry I received this week. It seems the taxpayer contributed $53,981 to a spousal RRSP in November 2024, which was the amount of contribution room available to his wife per her 2023 notice of assessment. When the taxpayer’s accountant prepared his 2024 tax return last month, he was advised that the maximum amount he should have contributed for 2024, based on his own RRSP limit, was only $31,560 (the 2024 maximum). As a result, he was only able to claim an RRSP deduction of $31,560 on his 2024 return, with the excess ($53,981 minus $31,560) being an overcontribution of $22,421.

I suggested that he withdraw the overcontribution (if any, as new room may have opened up for 2025 if he had 2024 earned income), and file the Canada Revenue Agency 2024

Form T1-OVP

to report the one per cent penalty tax for the months of overcontribution last year. He can then write to the CRA requesting a waiver or cancellation of the tax.

The CRA will consider such requests if the excess contributions arose due to a reasonable error, and you took reasonable steps to eliminate the excess contributions, generally by withdrawing the overcontribution as soon as possible.

A 2017 decision of the Tax Court involved just such an overcontribution. The taxpayer was an insurance broker who sold his practice in 2012, which generated significant taxable income that he attempted to reduce by making the maximum contribution into his RRSPs as well as spousal RRSPs. He said that he acted in good faith and was convinced that he was complying with the Income Tax Act. About twenty months later, he learned that he was not allowed to contribute to his spouse’s RRSPs, after he had reached the limit for his own RRSPs.

In November 2014, the taxpayer withdrew the excess contributions made to his spouse’s RRSPs. He was hit with overcontribution tax along with penalties for not filing the T1-OVP forms for each calendar year from 2012 to 2014. He argued that the overcontribution taxes and penalties were “unreasonable in light of the circumstances because it was a reasonable mistake that was not made in bad faith.”

Both the CRA and the judge agreed to set aside the late-filing penalties for the T1-OVP income tax returns for the 2012–2014 taxation years, but the overcontribution penalty tax was upheld.

So, assuming you don’t get into trouble with overcontributions, spousal RRSPs can be beneficial in a variety of ways. First, spousal RRSPs allow 100 per cent of withdrawals to be taxed in your spouse’s hands (assuming no attribution). Contrast that with a regular registered retirement income fund (RRIF), in which only 50 per cent of your RRIF income can be taxed to your spouse under the pension splitting rules, and only once you reach age 65. If you wish to retire before age 65, your spouse can still withdraw funds from the spousal RRSP (being mindful of the three-year rule), and have that withdrawal taxed in his or her name before you reach age 65.

Spousal RRSPs can also play an important role in retirement planning if you are over age 71 and still have RRSP room. With some seniors continuing to work well into their 70s, you may still be generating earned income and thus able to contribute to a spousal RRSP as long as your spouse is under age 72. And keep in mind you don’t necessarily have to be working to have earned income. The definition of earned income for RRSP contribution purposes includes rental income, so if you are over age 71 and own a rental property you can still contribute to a spousal RRSP if your spouse is under age 72.

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Spousal RRSPs can also be beneficial for younger couples looking to save up enough money for a down payment on their first home. Let’s say you are working while your spouse is either in school or perhaps staying at home looking after young children. Over the years, you could contribute to your own RRSP and to a spousal RRSP, to build up the savings for the new home. Then both you and your spouse could each withdraw up to $60,000, for a total of $120,000, under the

Home Buyers’ Plan

. This strategy can be used in conjunction with the new

first home savings account

.

Finally, the spousal RRSP can still play a role if you were to die with unused RRSP contribution room. In that scenario, your executor or estate representative can make an RRSP contribution to a spousal RRSP for your surviving spouse, so one final RRSP deduction can be claimed on your terminal return.

Jamie Golombek,
FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.
Jamie.Golombek@cibc.com

.

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