Kay Rhodenizer – January 2016
RRSP’s TIPS AND TRAPS FOR SEPARATING COUPLES
It’s important to understand how RRSP’s can be divided and the pitfalls to avoid. Here are only a few examples. We recommend obtaining legal advice before dealing with RRSP’s especially when there are other assets to divide or family debts to pay out.
- SPOUSAL ROLLOVERS DONE CORRECTLY:
The total value of both partners’ RRSP’s can be divided so each ultimately receives half by using a spousal rollover. There are no immediate tax consequences if rollovers are done properly. You must be separated, there must be a brief agreement signed by both partners (or a Court Order) with specific wording to satisfy Canada Revenue Agency and completion of a short CRA rollover form. Assuming this is done properly the rollover could look like this:
Joe has $70,000 in RRSP’s and Jane has $50,000. To equalize the total of $120,000, Joe would rollover $10,000 from his RRSP to Jane’s RRSP. Joe doesn’t pay tax on the $10,000. Jane would pay tax on this $10,000 only when she withdraws $10,000 from her RRSP after the rollover.
- DON’T TRADE RRSP’S FOR CASH WITHOUT CONSIDERING TAX:
Using the same example, if Joe wanted to keep all his RRSP’s and compensate Jane in cash, tax must be taken into account. Assuming Jane was in a 30% tax bracket, if she received $10,000 in RRSP’s and then withdrew them, her tax on this RRSP is $3000. Jane should be paid $7000 for the net value of the RRSP since she won’t pay tax on the $7000 cash she receives.
- DON’T TRADE DEBT FOR RRSP’s WITHOUT CONSIDERING TAX:
Using the same example, assume Joe and Jane owe family debts of $20,000 on a credit card and agree to share this equally. Jane might tell Joe to keep the $10,000 of RRSP’s he owes her and to assume her $10,000 of the debt. If Joe pays tax at 40% the after-tax value of the RRSP is $6,000. For this to be an “even trade” Joe would need to keep the $10,000 RRSP and have Jane pay another $4000 toward the debt.
In this example, if Jane pays tax at 30%, and must use RRSP’s to pay down family debts, it would make more sense for Joe to rollover the RRSP to Jane and for her to then withdraw it and put the $7000 net of tax toward the credit card debt. She’d the only have to find another $1000 to pay her share of the debt.
- POST SEPARATION RRSP CONTRIBUTIONS:
Usually these are not subject to division. If you plan to make post-separation contributions, it is highly recommended that you create a separate RRSP for these, making it easier to calculate which of your RRSP’s are subject to division and which are exempt.