How does a spousal RRSP help reduce taxes for a couple in Ontario?

A spousal RRSP is a registered account owned by one spouse but funded by contributions from the other spouse, who gets the tax deduction. The contributing spouse (typically the higher earner) deducts the contribution against their income and reduces tax at their marginal rate. The account grows tax-free. In retirement, withdrawals are income in the hands of the account holder (the lower-earning spouse), who may be taxed at a lower marginal rate — that is the income-splitting benefit.

Contributions to a spousal RRSP use the contributing spouse's own RRSP contribution room — it does not increase the total room available to the couple, but it redirects which account the deduction flows into.

There is an attribution rule: if the account holder withdraws from a spousal RRSP within three calendar years of the last spousal contribution, the withdrawal is attributed back to the contributor and taxed in their hands. This prevents short-term income splitting. Waiting at least three years after the last contribution avoids attribution.

Both the contribution and the deduction rules are federal, so they apply equally to Ontario residents. Ontario provincial tax savings are also realized because the contribution reduces provincial taxable income.