RRSP’s in Divorce and Separation: Don’t Forget the Taxes
When dividing matrimonial property in a separation or divorce one of the biggest questions that we get is, “How do my spouse and I divide our RRSP’s?” This is always a very important question because there are so many issues to consider when dealing with RRSP’s in a separation or divorce. Some of those issues are:
- Contribution room; and
- Income tax.
The good news is that when you and your spouse are separating, the Canada Revenue Agency (“CRA”) gives a lot of flexibility in how to transfer your RRSP in light of your separation. You are able to transfer any amount of RRSP regardless of contribution room to your former spouse while in the process of finalizing your separation or divorce; this is true for both common-law spouses and for legally married spouses.
Is it Better to Transfer RRSP’s or Keep Them, and Pay my Spouse Out of Other Assets?
One issue that often arises in a separation or divorce, is how to equalize a discrepancy in matrimonial property when a number of different family assets could be transferred or liquidated in order to pay out the spouse with less family assets. RRSPs are often considered, but should they be? This really depends on your financial situation and the tax implications with respect to the use of your RRSPs. Some people prefer to transfer out of their RRSP to try and create some contribution room. Others may wish to use their RRSP in their Matrimonial property equalization in order to prevent liquidating other assets, like a piece of land. However, receiving RRSPs may not be considered as favourable to a spouse who needs to be able to use family assets in the short term as there are negative tax consequences. It is always important to take into account that when cashing out an RRSP you will pay tax as the RRSP becomes income for the year you cashed it in.
In addition, taxes on RRSPs are often overlooked when spouses start calculating their matrimonial property division. When calculating the assets of each party it is important to remember that an RRSP is a pre-tax asset and that tax should be included to reduce the value. Therefore, in a divorce and separation, a notional tax – essentially taxing the RRSP in a hypothetical situation that it is actually cashed - is often applied to the calculation of the value of an RRSP.
How to handle RRSPs can be a tricky issue in a divorce or separation. The lawyers at Crossroads Law are experienced in property division under the Family Law Act in British Columbia, and the Matrimonial Property Act in Alberta. Please contact us for a consultation if you have any questions.