Definition of a Spousal RRSP Contribution:
A situation in which a person makes a contribution to his or her spouse’s RRSP. The contributor uses his/her contribution room, and reports the contribution on his/her tax return, thus saving income tax at his/her rate.
What is the advantage of a Spousal RRSP Contribution?
A couple can maximize their tax savings by using a spousal contribution strategically.
John and Marjorie live in Ontario and earn $25,000/year and $46,000/year respectively. They each want to make a contribution to their RRSPs of about $1,000 each.
John’s marginal tax rate is around 25%. Marjorie’s is closer to 31% due to her higher income.
If John and Marjorie each make a $1,000 RRSP contribution, John saves $250 on his taxes, while Marjorie saves $305 on hers, for a total of $555.
On the other hand, if Marjorie makes all the RRSP contributions — $1,000 to her own RRSP, plus a $1,000 spousal contribution to John’s RRSP – the total tax savings on her tax return will come to $610.
Spousal contributions are recommended when two conditions are met: the two partners have incomes far enough apart that they have different marginal tax rates; and the higher-earning spouse has enough contribution room to make the full contribution him/herself.