A Question of Cashing Out: RRSP’s in Divorce and Separation

RRSP’s in Divorce and Separation

“How do we divide the RRSP’s?”

It’s always tricky when dividing matrimonial property in a separation or divorce.

Key considerations when tackling the issue are contribution room and income tax. When you are separating, the Canada Revenue Agency (CRA) allows the transfer of any amount of RRSP, regardless of contribution room, to the other party. This applies for both common-law spouses and for legally married spouses.

“Should I transfer RRSP’s, or keep them and pay my spouse through other assets?”

This really depends on your financial situation and the tax implications of using your RRSP’s. Some people prefer to transfer out of their RRSP to create contribution room; others may choose to use an RRSP in their Matrimonial Property Equalization in order to prevent liquidating other assets such as property. However, receiving RRSPs may not be favourable to a spouse requiring family assets in the short term due to negative tax consequences.

“And what about the taxes if I cash out an RRSP?”

Taxes on RRSPs are often overlooked when spouses are doing the math on 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 the tax associated with cashing out should be included to reduce the overall value. Essentially, treat the RRSP as hypothetically cashed out to ensure the sums are correct.

Handling RRSPs can be problematic in a divorce or separation. To get the right advice for you situation, call our Legal Navigator at Coach My Case today.