Divorce and RRSPs
Earlier this month, 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Under the new Home Buyer’s Plan, RRSP funds withdrawn for the sake of buying a new home will need to be repaid over a 15-year period, starting two years after the initial withdrawal.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.
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