Gail Vaz-Oxlade's Guide To:
Divorce and RRSPs
Financially Smart Divorce
For more than 25 years you have witnessed Gail Vaz-Oxlade's trademark straight-up money wisdom, both on Radio and Television, most notably as host of TVs Till Debt Do Us Part, Princess and Money Moron. Gail is a best-selling Canadian financial author.
Gail Vaz-Oxlade's Guide To
Divorce and RRSPs
Financially Smart Divorce
Ontario Divorce and RRSPs
In the context of divorce, Registered Retirement Savings Plans (RRSPs) in Canada can be subject to division or sharing between spouses. Here are some key points to consider regarding RRSPs in the context of divorce in Canada:
Equalization of Net Family Property:
- In Canada, each spouse is entitled to an equal share of the “net family property” acquired during the marriage. RRSPs are considered part of the net family property, and their value may be subject to equalization.
RRSP Transfers:
- RRSPs can be transferred between spouses without tax implications, as long as it is done in accordance with the tax rules outlined in the Income Tax Act. This transfer is typically part of the equalization process.
Direct Transfers to Spouse’s RRSP:
- Instead of withdrawing funds from an RRSP and transferring them to the other spouse, it’s often more tax-efficient to arrange a direct transfer of RRSP assets between the spouses. This can be done without triggering tax consequences.
Tax Implications:
- Withdrawals from an RRSP are generally considered taxable income. However, under certain circumstances related to divorce or separation, funds can be transferred between spouses without immediate tax consequences.
Separation Agreements:
- Spouses may include provisions regarding RRSPs in their separation agreements. This can outline the division of RRSP assets, the method of equalization, and any conditions or timelines for such transfers.
Qualified Domestic Relations Order (QDRO):
- In the Canadian context, there is no direct equivalent to the U.S. Qualified Domestic Relations Order (QDRO) for RRSPs. However, the separation agreement or court order can provide the necessary authorization for the transfer of RRSP assets between spouses.
Pension Adjustment (PA):
- The Pension Adjustment, which is a measure of the benefits accrued under a pension plan, may be relevant in the context of divorce. The PA is taken into account when determining the value of pension benefits subject to equalization.
Professional Advice:
- It is advisable to seek the guidance of legal and financial professionals when dealing with the division of RRSPs in a divorce. Family law professionals and financial advisors can provide personalized advice based on the specific circumstances of the divorce.
Remember that the rules and regulations surrounding RRSPs and divorce can be complex and subject to change. Seeking professional advice ensures that you understand the implications of dividing RRSP assets and can help you make informed decisions aligned with your financial goals and legal obligations.
The Unofficial Rules of Divorce:
- Divorce gets prickly, even in the most amicable situation
- It’s often less about the legalities and more about the money
- People make expensive mistakes because they don’t make a plan
- Before you do anything, understand your rights, obligations & complexities
The Unofficial Rules of Divorce:
- Divorce gets prickly, even in the most amicable situation
- It’s often less about the legalities and more about the money
- People make expensive mistakes because they don’t make a plan
- Before you do anything, understand your rights, obligations & complexities
Divorce and RRSPs
Recently, the Federal Budget updated a Canadian federal tax law that has major implications for family law and divorcing individuals.
The Canadian Home Buyer’s Plan, the same plan that allowed first time homebuyers to withdraw from RRSPs to purchase their first home, now allows separating spouses to withdraw from their RRSPs without being hit with a tax penalty. The small print; the money must goes toward the purchase of a new home.
Separating Spouses Can Use RRSPs as A Down Payment on a New Home
Under the new Home Buyer’s Plan, RRSP funds withdrawn for the sake of buying a new home will need to be repaid over a 15-year period, starting two years after the initial withdrawal.
In order to qualify, you must have a written Offer to Purchase Agreement to buy or build a qualified home, which was not owned by you, more than 30 days before you withdraw the funds.
The Plan is available to formal marriages and/or common law separations and can be accessed up to 4 years after the date of separation. The maximum withdrawal amount allowable from an RRSP has been increased to $35,000, and the entirety of the amount must go towards the home down payment.
In family law matters, when dividing property the assumption is that each party has equal entitlement to any and all funds held in RRSPs regardless of who’s name they are in. Separating spouse’s may take advantage of the tax benefits and choose to withdraw funds from their RRSP before the determination of marital assets takes place. However, the money taken out must be accounted for correctly in the Net Family Property Statement, along with the appropriate calculations for their proportionate share of the associated tax benefits.
The Canadian Home Buyer's Plan: Leveraging RRSPs
If you are a separating spouse and assuming you qualify for the Home Buyer’s Plan, you must first complete a CRA Form T1036 (HBP Request to Withdraw Funds from an RRSP) and submit it to your RRSP issuer.