Spousal RRSP Strategy: Leverage Your Tax Refunds

Evelyn Jacks

Are you making full use of the tax advantages available by investing in a Spousal RRSP?  It’s a legitimate way to get a lucrative tax deduction in 2024, defer tax on income earned in the registered account, split income in retirement and in many cases, avoid clawbacks of income-tested benefits and credits.  Yet the simple strategy of using a Spousal RRSP for all these benefits is often missed.  Here are the basic parameters to share with your clients, who may wish to start by investing their tax refund.

The Tax Deduction. Deductible RRSP contributions can be used to reduce taxes payable in the current tax year as long as the taxpayer had RRSP contribution room.  This is easily checked by consulting the Notice of Assessment or Reassessment from the Canada Revenue Agency (CRA).  The contribution deadline is usually March 1st (60 days after the tax year end; meaning once every 4 years the deadline is February 29). The deduction is made on the income tax and benefit return in any amount – that is, you can use some, all or none of it; choosing to carry forward the balance to a future tax year if you like.

And that’s how we get to this RRSP contribution equation.  Taxpayers can claim a tax deduction on their own return for:

• contributions made to their own RRSP
• any unused RRSP contributions from a previous year
• contributions made to their spouse’s or common-law partner’s RRSP

Age Matters.  Aside from the above requirement for RRSP contribution room, an RRSP contribution is subject to another restriction:  the contributor must be under age 72.  That’s where a spousal RRSP can be particularly useful.

Spousal RRSP Advantages.  If an age-ineligible taxpayer has a spouse or common-law partner who is age eligible, a spousal RRSP contribution can be made to use up RRSP contribution room and generate the deduction for the age in-eligible taxpayer.  This is of great importance when the older spouse is still the higher income earner. 

An individual who is 72 years of age or more, having enough accumulated contribution room, may contribute to a spousal RRSP until the end of the year during which the spouse reaches 71 years of age.  This allows for a longer contribution period and tax sheltering of retirement income accumulations for the household, as well.  Down the line, a spousal RRSP is particularly advantageous in retirement for spouses who are of different ages as it creates additional income splitting opportunities.

Spousal RRSP Disadvantages. The amount invested in a spousal RRSP reduces the amount of contributions the taxpayer is entitled to make to his/her own RRSP. A spousal RRSP belongs to the spouse, and the taxpayer who contributes to such a plan has no legal rights to these amounts.  This could have some disadvantages in the case of marriage break-ups, if this is a surprise to the older, contributing spouse. 

Avoid the Tax Trap.  There is a tax trap when it comes to withdrawing the funds from a spousal RRSP.  If they are withdrawn within 3 years of any contribution, the withdrawal is taxed in the hands of the contributing spouse.  An exception exists when the money is converted into a RRIF within the three year period.  In that case, the minimum RRIF withdrawals are taxed in the hands of the beneficiary spouse; amounts above this, in the hands of the contributing spouse.

Other options for the older Spouse.  Although a taxpayer cannot contribute to their own RRSP past the age of 71, they can still claim a deduction for contributions made in previous years. Deductions at this point may help to reduce net income and the potential of having a clawback in their OAS or other tax credits or social programs.

Leverage the Tax Refund:  Advisors and clients who review options under RRSPs and other registered accounts will be able to consider accelerating wealth creation to offset higher taxes.  The spousal plan is strategy  available only under the RRSP.  It’s a good place to put this year’s tax refund. . .adding tax benefits for many years into the future as explained above.

Added Bonus:  An RRSP deduction reduces net income, the figure upon which clawbacks of social benefits and credits are calculated.  That’s always a win for middle income families. With more social benefits  emerging that are income tested – think the Canada Dental Care Plan and Pharmacy Plans – the RRSP can make a lot of sense to an older population as well if incomes are just around the top of the threshold levels.

Make a Difference.  Learn more about Retirement Income Planning Strategies with Knowledge Bureau’s DMA™ designation Program.