Understanding Spousal RRSP Withdrawals

A Spousal Registered Retirement Savings Plan (RRSP) is a retirement savings vehicle where one spouse or common-law partner makes contributions to an RRSP in the name of the other.

These are called the contributor and the annuitant respectively.

This allows couples to split income in retirement, which reduces overall tax burdens.

But withdrawing funds from a spousal RRSP comes with tax considerations.

One of the most important is the 3-year attribution rule. This is a provision made to prevent couples from using spousal RRSPs to gain short-term tax advantages.

If withdrawals are made within three years of a contribution, the amount may be taxed to the contributor rather than the annuitant.

The results of this can be unexpected tax consequences and negate the benefits of income splitting.

Knowing the rules and the way things work is important to maximizing the advantages you can get out of a spousal RRSP.

What is a Spousal RRSP?

In a spousal RRSP, the contributor deposits money into a retirement savings plan that is legally owned by the annuitant.

The contributor funds the account and receives the tax deductions, the annuitant controls the account and is responsible for future withdrawals.

Spousal RRSPs work best for couples where one partner expects to have higher retirement income than the other.

This includes situations where one spouse has a higher salary, more pension benefits, or larger personal savings.

Shifting the income from a higher-earning spouse to a lower one helps secure equal retirement incomes for both partners, and results in lower marginal tax rates.

How Spousal RRSP Withdrawals Work

Only the annuitant can make withdrawals from a spousal RRSP.

Even though the contributor provides the funds, they have no legal right to access or withdraw money from the account.

Withdrawals can be made at any time, but they are typically planned for retirement.

This timing matters because withdrawals are considered taxable income in the year they are made.

Unless certain conditions trigger attribution rules, the amount withdrawn is taxed in the annuitant's hands.

That means potential tax savings if the annuitant's income is lower than the contributors at the time of withdrawal.

The 3-Year Attribution Rule Explained

The attribution rule is a tax provision that states that if the annuitant withdrawals money within three calendar years of the contributor's most recent contribution, all or part of the withdrawal may be attributed back to the contributor and taxed as their income.

This rule helps to preserve the longevity of the RRSP.

The Canada Revenue Agency (CRA) tracks spousal RRSP contributions and withdrawals with information submitted on annual tax slips and through Form T2205.

Each contribution is linked to the calendar year of withdrawal, and the CRA looks back in that year and the two preceding it to decide if the attribution rule applies.

For example, if a contribution is made in 2025 and the annuitant withdrawals before the end of 2028, then the amount withdrawn may be attributed to the contributor up to the value of the contributions made in 2025, 2026, and 2027.

If the withdrawal happens after 2028, the full amount would generally be taxed in the annuitant's hands, assuming no other contributions were made within the three-year look-back period.

A more complex example: suppose the contributor deposited $1,000 every year for 10 years, and the annuitant withdraws $6,000 in 2025. If $4,000 of those contributions were made in 2022, 2023, and 2024, then that $4,000 would be taxed as income for the contributor.

The remaining $2,000 coming from contributions made more than three years prior would be taxed as income for the annuitant.

Basically, attribution determines who pays the tax on the withdrawal.

If the withdrawal includes recent contributions, the contributor is taxed on that portion.

If it consists of older contributions, the annuitant is taxed.

Tax Implications of Spousal RRSP Withdrawals

The tax implications depend on the timing of the withdrawal and whether the attribution rule applies.

In general, the annuitant pays tax on any withdrawals they make.

However, if the contributor has made deposits into any of the annuitant's RRSPs within the three year period, the attribution rule may apply.

When a withdrawal is made, the annuitant receives a T4RSP slip, which reports the amount withdrawn and any tax withheld at source.

Even if the slip is issued in the annuitant's name, the income may need to be split between both spouses for tax reporting, depending on attribution calculations.

For allocation, couples must complete Form T2205.

Ideally, spousal RRSP withdrawals should be made at a time when the annuitant is in a lower tax bracket such as during retirement, and more than three years after the last contribution by the contribution.

This allows for a lower marginal rate for the annuitant rather than higher rates if attributed back to the contributor.

Poorly timed withdrawals can increase a couples overall tax bill by pushing income into a higher tax bracket or triggering attribution.

Exceptions to the Attribution Rule

There are several exceptions to the attribution rule that allow withdrawals to be taxed solely in the hands of the annuitant. The attribution rule does not apply if:

• The withdrawal happens after a legal breakdown of the relationship.
• Either the contributor or annuitant is a non-resident of Canada at the time of withdrawal.
• Withdrawals are transferred directly to another registered plan like a Registered Retirement Income Fund (RRIF).
• The contributor dies in the same year the annuitant makes the withdrawal.
• Contributions made are more than three full calendar years old.

Disadvantages and Risks of Spousal RRSP Withdrawals

There are benefits to an RRSP, but it's of equal importance to understand the potential disadvantages and risks involved.

Below are some of the things to keep in mind before using a spousal RRSP:

• Withdrawing within three years of a contribution may trigger attribution, making the contributor pay tax.
• The contributor loses control once funds are contributed; the annuitant manages the account.
• Contributions are limited by the contributor's RRSP room, restricting how much can be saved.
• Early withdrawals can lead to higher taxes if the annuitant's income is still high.
• Tracking contributions and withdrawals adds complexity to tax planning.

Strategic Tips to Minimize Taxes on Withdrawals

Careful planning is important to minimize taxes on spousal RRSP withdrawals. Some things to plan around are:

• Avoid making contributions within three years of a planned withdrawal.
• Plan withdrawal timing based on the annuitant's income level and tax bracket.
• Treat spousal RRSPs as a long-term retirement tool rather than a short-term tax shelter.
• Use Form T2205 accurately when attribution applies for proper tax reporting.

Now you have all the most important information about spousal RRSP withdrawals.

But it can be a lot for a couple to navigate on their own.

For the best results, it's a good idea to consult a financial advisor or tax expert who can create plans centered around your circumstances.