Tax Planning: Should I contribute to a spousal RRSP?

While an RRSP account can help you save for retirement, a Spousal RRSP may provide additional benefits to you as a couple both before — and in — retirement.

Understanding the differences between a regular and a Spousal RRSP

1. Regular RRSPs. When you set up a regular RRSP for yourself, you are both the contributor and the owner of the account. That means you contribute to the account, you get the tax deduction from the contributions. Then, when you withdraw from the account in retirement, the withdrawn dollars are added to your taxable income and you pay the tax owing, if any.
2. Spousal RRSPs. When you contribute to a Spousal RRSP account, you still get the tax deduction, but the plan is in your spouse’s or common-law partner’s name. For physicians, it may be a great income-splitting option if one of you earns more than the other. Just like with a regular RRSP, you are the contributor to the account. However, unlike a regular RRSP, your spouse or common-law partner is the owner of the funds in the Spousal RRSP account — and when those funds are withdrawn, they pay any tax owing.

How a Spousal RRSP may benefit households

Because of Canada’s graduated income tax system, when one spouse or common-law partner has a higher income than the other, the higher-earning individual usually pays tax on their earnings at a higher rate.

For example, if you’re a practicing physician earning a high salary, you may pay tax at rates as high as 50% or more, while your lower-earning partner may pay 30%. And a spouse or partner not earning employment income may be paying no income tax at all.

If you and your spouse or common-law partner have significantly different incomes, it can make sense to set up a Spousal RRSP, so that the higher-earning individual contributes to an RRSP for the lower-earning individual. That way, as a household, you can take advantage of the different tax rates while working and in retirement.

Here’s how a Spousal RRSP can work for medical professionals:

Before retirement: Sarah and Jerome

• Sarah’s salaried income as a physician is taxed at 54% and her common-law partner Jerome is a sessional university lecturer with a top tax rate of 30.5%.
• If Jerome contributes $1,000 to his own RRSP, he’ll get a tax deduction of $305 (30.5% x $1,000).
• If Sarah contributes $1,000 into Jerome’s Spousal RRSP, she would benefit from a tax deduction based on her 54% rate. That means on the same $1,000 contribution, Sarah would get a tax refund of $540.
• Sarah’s tax refund is the same, but her contribution means that Jerome will be taxed on the withdrawals from the Spousal RRSP.

In retirement: Sarah and Jerome

• Since Sarah used some of her RRSP room and her higher earnings to contribute to a Spousal RRSP account for Jerome, the couple have roughly equal amounts in their RRSP accounts.
• This means when they withdraw from those accounts in retirement, they will each be taxed separately, lowering their household tax bill.
• Instead of paying tax on $5,000 each month from Sarah’s RRSP, both she and Jerome can each withdraw $2,500 from their respective RRSP accounts.
• Because of Canada’s graduated tax system, this “evens out” their incomes providing tax efficiencies better than if all the RRSP withdrawals were from one account.

Is a Spousal RRSP right for my household?

In the right circumstances, incorporating Spousal RRSPs in your household tax and retirement planning may make sense. Many medical professionals open up a separate Spousal RRSP account to make it easier for recordkeeping. However, a regular RRSP account becomes a Spousal RRSP account when a spouse or common-law partner makes a contribution to it.

If you’d like to learn more about whether you can benefit from Spousal RRSPs or how to open a Spousal RRSP account, talk to one of our dedicated RBC Healthcare Specialists.