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Withdrawing From A Spousal RRSP

You work full-tme and earn a decent salary and your spouse stays at home with the kids.  Over the years you have contributed to a Spousal RRSP [1] and have accumulated funds inside the RRSP.  You wonder if your spouse should withdraw the funds from the RRSP tax-free now while they have no income and then invest the money outside of the RRSP.

Beware of The Spousal RRSP Anti-Avoidance Rules

If you have contributed to a spousal RRSP in the current or preceding two years, the amount withdrawn will be added to your income but only up to the amount you contributed in the current and preceding two years.

This means that if your spouse withdraws $10,000 from the spousal RRSP and you contributed a total of $4,000 to the spousal RRSP during the current year and prior two years, you must include $4,000 in your income and your spouse included $6,000 in theirs.

These rules are designed to impose a waiting period in order to prevent one spouse taking a deduction and the other spouse withdrawing the funds tax-free.

Wait Three Years And Withdraw

What happens if you don’t make any contributions for three years and then withdraw $10,000 or less?

Your spouse can withdraw an amount tax-free from the RRSP that is less than their basic personal amount, which in 2009 federally is $10,320.  However, the $10,320 is considered income for the purposes of determining the spousal tax credit and the withdrawal would eliminate the spousal credit in the year of the withdrawal.  In addition, if the funds were then invested, the investment income would reduce the spousal credit annually.


Jane Smith is 35 years old and earns $120,000 year.  Her husband Tom, also 35, is a stay-at-home dad who has no income.  Over the last four years, Jane has contributed the following amounts to a spousal RRSP for Tom:

The current balance in the RRSP is $12,000 and they are residents of Ontario.

Jane and Tom feel they can withdraw $10,320 from the spousal RRSP this year and investing the funds in a non-registered account.  By doing so, they feel that they can access the funds at any time and no longer need to worry about taxes should they need to access the funds.

The Analysis

The amount of the withdrawal exceeding Jane’s contributions from 2007 though 2008 is added to Tom’s income and the difference is added to Jane’s Income.  As a result, Tom will have taxable income of $3,120 and Jane’s taxable income will increase from $120,000 to $127,200.  The increase in Jane’s income increases her taxes payable and the increase in Tom’s income, while not taxable, reduces the spousal credit Jane’s claims on her taxes.

  Before   After   Difference
Jane’s Taxable Income $120,000   $127,200   $7,200
Basic Tax Payable* $36,718   $39,872   $3,154
Spousal Tax Credits          
Federal (1,548)   (1,080)   468
Provincial (712)   (523)   189
Income Tax Payable $34,458   $38,269   $3,811
* Includes the basic personal tax credit of $10,320.    

From this table you can see that the withdrawal was not tax free because Jane’s taxes actually increased by $3,811.

Impact of Investing The Funds Outside An RRSP

If the $10,320 withdrawn from the RRSP is then invested what is the impact to Jane and Tom?  Since Tom has no other income, the $10,320 would generate about $720 in income (in 2009).  This income is not taxable to Tom but would reduce Jane’s federal spousal credit by $108.  And going forward Jane’s spousal credit would be reduced by the investment income earned by Tom.

Since Tom’s income is not taxable the invested funds would grow at the same rate outside the RRSP as inside.  At age 71 the $10,320 would be worth $118,000 whether it was invested inside the RRSP or out.

The Conclusion

In this scenario, Jane and Tom withdrew from Tom’s RRSP and incurred a one-time tax increase of $3,800 plus will have Jane’s spousal tax credit reduced annually going forward.  In the end, all that happened was that Jane and Tom paid more tax. 

If Jane waits three years and does not make any spousal RRSP contributions, and then withdraws the funds from Tom’s RRSP, Jane’s spousal tax credit will still be reduced and they are not really ahead.

The best strategy in this case would be to leave the funds in the RRSP.