Spousal RRSP and Its Withdrawal-Tax Treatment

As we all know, we can make contribution to a Spousal RRSP and take a deduction on our tax return. Spousal RRSP is the one where contributor is the tax payer and the annuitant (i.e.one who receives the benefit of the funds) is the spouse of the contributor. Contribution to the Spousal RRSP uses up contributor’s RRSP limit.

However, it is important to note the tax implications of the withdrawal from Spousal RRSP. If there

Is a withdrawal made by the spouse of the contributor within first three years of its contribution, it is treated as an income of the contributor and the withdrawal made after three years is treated as an income of the income of the spouse. This provides us with an excellent tax planning opportunity in the sense that contributor can avail of the higher tax break due to his higher marginal tax rate and spouse can pay lower taxes due to her low marginal tax break.

However, here is the caution note for such withdrawal. When there is a withdrawal from Spousal RRSP,

the question that arises is how to ascertain as to out of which funds the spousal RRSP withdrawal is made. Canada Revenue Agency will treat the withdrawal being made from the latest Spousal RRSP contribution.

As a result, if you made any contribution to the spousal RRSP three years before its withdrawal, it will be 

added as an income of the contributor and not the spouse and can have significant tax liability on your tax return.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.