Are you wondering how divorce impacts your RRSP assets? A Registered Retirement Savings Plan is a retirement investment vehicle for both employees and self-employed.

This is a tax-advantaged account, giving investors tax breaks to encourage them to put away money for their retirement years. Tax breaks also allow you to live more freely since a sizable portion of your money won’t go into taxes, and you can invest it in other income-generating ventures. In addition to building up your retirement fund, an RRSP could let you enjoy your working years.

Dividing RRSPs in Divorce: The Legal Framework

Married couples can set up a spousal RRSP. This allows both spouses to split their income and pay less combined tax upon retirement.

This is especially beneficial to couples that earn disproportionate taxable incomes, as the higher-earning spouse receives a large tax deduction. This can help couples steadily build up their RRSP to enjoy in their retirement years. However, one downside to spousal RRSPs is if the couple gets divorced before they retire.

Divorce Impacts Your RRSP

According to statistics gathered from recent years, more and more Canadian couples are getting divorced, with the latest data revealing that there are 2.71 million people legally divorced and not remarried as of 2020.

Spousal RRSPs are considered family assets, so if a marriage ends in separation or divorce before reaching the retirement stage, these assets legally belong to the person signed on as the primary owner of the plan. However, like other family assets, spouses will split the funds equally. This transfer is generally tax-free.

RRSP Divorce Transfer

This process looks simple on paper, but things can get more complicated. Each spouse is suddenly thrust into a reality where they’ll have to run a household on individual incomes, on top of gearing up for retirement.

A 50-50 split may be ideal, but the path to achieving that allocation of assets can be arduous. RRSPs cannot be overlooked when calculating the matrimonial property division, as they can be worth significant sums. Say Mr. A and Mrs. A have a family home worth $600,000 and RRSP assets worth $350,000.

Mr. A wants to keep the house, and he can pay for the family house with a combination of RRSP assets, cash, and credit. The issue could be that Mrs. A doesn’t want RRSP assets as they are less valuable in the short term and will require increased taxes when she withdraws them later.

What happens when you separate?

As a solution, RRSPs can equalize assets between spouses, and you won’t incur taxes in the transfer process. However, this must be done by transferring directly between the spouses’ own RRSP accounts. If you withdraw your RRSP early, you must declare the full amount withdrawn as income.

This means you could be liable to pay quite hefty taxes. The divorcing couple must consider the short-term and long-term benefits of moving or withdrawing their funds.

Tax Implications

Divorce can quickly derail RRSPs between families and spouses. The division of all assets—RRSP and beyond—can become contentious at any point. Whether you’re dealing with inheritances after a death or property division following a divorce, please get in touch with us for more information. We hope you enjoyed this article on how divorce impacts your RRSP.