What Happens To The RRSP (Registered Retirement Savings Plan) In Case Of A Divorce?
Divorce lies on the other side of our lives, natural and widespread. You decide to go for it when you see it as the last option. It is an extreme condition affecting your financial planning and other long-term goals. RRSP can be a savior and help you manage your finances during such an event. Let us explore further and know all the laws, rules, and procedures related to RRSP in a divorce.
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What Is An RRSP?
RRSP stands for Registered Retirement Savings Plan. As the name suggests, it is a savings plan wherein you contribute a portion of your income and keep accumulating it until you attain retirement. You get the advantage of holding your annual contributions in an RRSP and keep growing it until you retire.
| How Much Can You Contribute to an RRSP? | How Are Funds Invested in an RRSP? |
| • The annual contributions to an RRSP are usually capped and you cannot contribute anything beyond that limit. • In the year 2021, the maximum limit was higher of: a) 18% of the income earned by you in 2020 and b) $27,830 | The funds contributed by you to the RRSP are invested as per your direction in the various investment plans, such as: • Stocks of a listed entity • Debt instruments (corporate bonds, debentures, etc.) • GIC (Guaranteed Investment Certificates) • Mutual funds • Exchange Traded Funds (ETFs), etc. |
An RRSP is tax-sheltered, and you are not required to pay any tax on the income earned by making such investments. However, you have tax liability on the money withdrawn from your RRSP after retirement.
How Are the Funds Accumulated in an RRSP, Divided at The Time of Divorce?
The fund managers do the fund division in an RRSP according to the family laws applicable to each province.
“What will I get?” is a common question often asked by the parties involved in a divorce. Let us try to answer this and understand what exactly happens in different situations.
Situation 1: the RRSP Assets are Marital Property As per family law provisions:
- You contribute to the RRSP and consider the accumulated profits as marital property. You divide it among both the spouses in a ratio of 1:1.
- Divide the total value of an RRSP, as found out at the time of divorce, equally among the erstwhile husband and wife
- Either of the spouses needs to pay an “equalization payment” to attain this ratio of 1:1
- This rule is subject to a few case-specific exceptions and conditions, and you must consult your family lawyer to understand them.
Situation 2: Division of RRSP Before Marriage
- All the funds accumulated in an RRSP before marriage are yours. You are not required to divide anything with your partner.
- However, you will be required to prove your case via evidence, witnesses, and other relevant documents.
* Note that you are not required to divide anything with your spouse that you have accumulated before your marriage.
For example, if you had an RRSP balance of $50,000 before marriage, you would not include this amount in the net family assets. Hence, you will not split it equally.
Practical Example Showing Division of Funds Accumulated in RRSP
Let us improve our understanding of the division process through a practical example.
- Emma is a social media marketer and married Michael, a software engineer who has been married for ten years. They are currently living in the Greater Toronto Area.
- Both Emma and Michael had the following balances in their RRSP accounts before getting married:
- Emma’s RRSP: $80,000
- Michael’s RRSP: $40,000
- After getting married, they started making combined contributions to their RRSPs (Registered Retirement Savings Plan).
- Presently, the value of their respective RRSPs stands as below:
- Emma’s RRSP: $400,000
- Michael’s RRSP: $260,000
- Both Emma and Michael jointly own a residential dwelling in Brampton, Toronto. The current market value of this property is $500,000
- Due to divorce, they have split their assets in an equal ratio.
Now, let us explore the division process and study the different statements prepared during these times:
Statement Showing Assets Held at The Time of Divorce (Gross Family Property)
| Name of the Asset | Emma | Michael |
| Rrsp | $400,000 | $260,000 |
| Add: Joint Property (Value Divided Equally Among Both The Spouses) $𝟓𝟎𝟎,𝟎𝟎𝟎/𝟐 | $250,000 | $250,000 |
| Gross Family Property | $650,000 | $510,000 |
Statement Showing Calculation of Net Family Property And Equalization Payment
| Name of the Asset | Emma | Michael |
| Gross Family Property | $650,000 | $510,000 |
| Less: RRSP Held At The Time Of Or Before Marriage | $80,000 | $40,000 |
| Net Family Property | $570,000 | $470,000 |
| Equalization Payment ( ($570,000−$470,000)/2) ($50,000 Paid by Emma To Michael To Even Out the Net Family Property) | -$50,000 | +$50,000 |
| Equal Amount Both Emma And Michael Are Entitled to At the Time Of Divorce | $520,000 | $520,000 |
Should You Do Liquidation of RRSP At the Time of Divorce or Instead Go for A Transfer?
It is a fact that all the income generated from an RRSP are tax-free and will remain to be so until you withdraw funds from it. However, at the time of divorce, you have two options wherein:
- You can liquidate your RRSP, sell all the investments, and split the amount realized
Or
- You can transfer the assets held in your RRSP without selling them
Between these two, “transfers” are a better option than tax-free. However, such a transfer must be a part of the divorce settlement.
