Going through a breakup or divorce can be one of life’s most stressful events, and its effect on long-term financial plans is profound. After years of mapping your future together and focusing on retirement savings as a couple, it’s natural to wonder “what now?” when it comes to your registered retirement savings plans (RRSPs).
Property division on marriage breakdown is complicated and governed by provincial law. While, for the most part, RRSP investments are treated the same way as any other asset in the division of property, it’s good to be aware of their unique qualities and tax considerations to help assess your fair share and plan protectively if you divorce.
Note: This article is not intended to be legal advice. Family law, pension law and division of assets are complicated, so please speak to a family lawyer for advice specific to your situation.
Who’s entitled to RRSPs accumulated during a marriage
Each province has its own rules around family law and “who gets what” in the case of a divorce, dissolution of a common-law relationship under a domestic contract, if applicable, or separation of de facto spouses who have a cohabitation agreement in Quebec.
When RRSP investments count as marital property: With a few exceptions, property and profits accumulated through the course of a marriage by either spouse are subject to equal sharing on marriage breakdown. Family law generally assumes each spouse to be equally entitled to the value of RRSPs in the name of either person (including spousal RRSPs) — although not necessarily the RRSP itself.
One spouse may have to pay the other an “equalization payment” to even out their respective net family property.
Investments that pre-date your marriage are generally yours. As with other property, the value of your RRSPs prior to the marriage is yours alone, provided you can prove that was the case. However, any growth in assets between the date of marriage and separation is counted as part of the net family property calculation.
A simplified example of property division1
Jessica, 35, a physician, and Olivier, 42, a tech entrepreneur, plan to go their separate ways after 10 years of marriage. They live in Ottawa and do not have a marriage contract. Jessica didn’t save much through her medical training, while Olivier supported the household and contributed to Jessica’s spousal RRSP. Before marriage, Olivier had $100,000 in his RRSP, while Jessica had no assets.
Lifted by Olivier’s aggressive investment strategy, both their RRSPs grew substantially through a combination of regular contributions and market returns. Olivier’s RRSP is worth $600,000, while Jessica’s spousal RRSP is worth $100,000. They also own a condo jointly, currently valued at $800,000 with no mortgage.
The value of net family property to be split is based on their assets accumulated since marriage:
| Olivier | Olivier’s Assets | Jessica | Jessica’s Assets |
|---|---|---|---|
Assets at separation
|
$1,000,000 | Assets at separation
|
$500,000 |
Minus assets at marriage
|
-$100,000 | Assets at marriage
|
$0 |
| Net family property | $900,000 | Net family property | $500,000 |
| Minus equalization payment due to Jessica | -$200,000 | Plus, equalization payment from Olivier | +$200,000 |
| Amount Olivier is entitled to | $700,000 | Amount Jessica is entitled to | $700,000 |
Consider after-tax values, future needs, to divide RRSP assets fairly
When calculating the value of RRSPs in a divorce settlement, it’s important to view them as tax-deferred assets and take future tax implications into account, whether that’s in retirement or if one of you intends to cash out.
This isn’t always easy to determine, as future tax rates will vary depending on the level of income of the person withdrawing the funds. A fair split might apply an agreed-upon notional tax rate, such as 30%, to reduce the RRSP value accordingly when dividing property. You’re essentially estimating the after-tax value of the fund.
Jessica and Olivier: Beware the unequal RRSP “buyout”
Olivier wants to keep the condo and buy out Jessica’s share of the property. This means he would have to pay Jessica $400,000 for her half of the condo, on top of the $200,000 equalization payment to even out marital property.
He offers to transfer his $600,000 in RRSPs to Jessica. It’s easy to see why such an exchange could be unequal, since it’s impossible to calculate future growth and taxes of the RRSPs with any certainty.
While Olivier will likely benefit from tax-free capital gains on future appreciation of the condo, Jessica may face negative tax consequences if she has to dip into RRSP funds in the short term and will certainly have to pay tax on the funds when she withdraws them in retirement.
If Olivier can’t offer cash for a buyout, perhaps by taking out a mortgage may be fairer to Jessica..
RRSPs can help split assets tax-efficiently
It rarely makes sense to liquidate RRSP assets in a divorce or separation, since you can transfer RRSP assets between spouses tax-free. Tax provisions allow one partner to make a direct RRSP (or RRIF) transfer to another, provided it is specified as part of a divorce settlement or written separation agreement.
This means any amount may be transferred from one RRSP to that of an ex, with no tax impact — regardless of contribution room — so long as it remains within an RRSP of the recipient.
What else to know for a clean break and fresh start
Your RRSP beneficiary designations won’t change automatically. Take note that any beneficiaries named on a RRSP (or RRIF), or in your will, aren’t automatically revoked in the event of a marital breakdown. Unless you remove their name as beneficiary, your former spouse or partner could still be entitled to your RRSP assets if you die.
You can borrow from your RRSP as a “first-time” homebuyer, all over again! As of 2020, Canadians who experience a breakdown of a marriage or common-law partnership may be eligible to tap into up to $35,000 from their RRSPs, tax-free, to access the federal Home Buyers’ Plan to purchase or build a new home. With the right timing, subject to certain conditions, this can even be applied toward buying out a partner’s share of the former matrimonial home, if you’ve been living separate and apart. The Home Buyers’ Plan allows you to pay back the RRSP funds within 15 years.2
Through stressful times, a financial plan helps keep you steady
While your RRSP investments will survive as the bedrock of personal financial planning, registered plans may also provide tax-effective ways to split or equalize household assets in a marital breakdown.
Your MD Advisor* can help apply best practices for physicians to prepare financially for divorce, with advice to reset plans and keep moving forward. Please seek independent legal advice about dividing your assets.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 The hypothetical case study is for illustrative purposes only and does not represent actual clients. Any resemblance to actual people or situations is purely coincidental.
2 Your repayment period starts the second year after the year when you first withdrew funds from your RRSP(s) for the HBP.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.
