Dividing RRSPs in an Ontario Divorce Without Triggering Tax

If you are divorcing in Ontario, your RRSP may be one of the largest assets you own. Withdrawing money to hand to your spouse can create a tax bill, so the way the money moves matters as much as the amount.

This article explains how RRSPs fit into property division, how a transfer can happen without immediate tax, how spousal RRSPs are treated once you separate, and the deadline for making an equalization claim. Your own numbers and tax position will differ, so confirm the details with a lawyer or accountant.

How RRSPs are counted in property division

In Ontario, married spouses do not simply split each account in half. Instead, each spouse works out their net family property: the value of the property they own on the valuation date, minus debts and permitted deductions. It is never less than zero.

RRSPs and pensions are counted as property. The spouse whose net family property is smaller is then entitled to one-half of the difference between the two amounts. That payment is called equalization.

The court may award more or less than half the difference if equalizing would be unconscionable. Some property is also excluded, such as gifts or inheritances from a third party received after the marriage (other than a matrimonial home), personal injury damages and life insurance proceeds. The person claiming an exclusion must prove it.

Why the date of separation matters

The valuation date is the earliest of several dates, and one of them is the date the spouses separate with no reasonable prospect of resuming cohabitation. That is why the separation date matters: it is one of the dates that can fix when your RRSP is valued for equalization.

If you and your spouse disagree about when you separated, or you stayed under the same roof, the answer can affect the numbers. Courts decide that kind of question case by case, so get advice early.

Moving RRSP money between spouses without immediate tax

Equalization is a payment obligation, but it does not have to be paid by cashing out an RRSP. RRSP funds can be transferred directly, without immediate tax, to an RRSP or RRIF of a spouse, common-law partner or former spouse or partner.

Two conditions apply. The spouses must be living separate and apart, and the transfer must be made under a court order or a written separation agreement dividing property on the breakdown of the relationship. The CRA reports this kind of transfer on Form T2220.

• You and your spouse are living separate and apart.
• There is a court order or a written separation agreement that provides for the transfer.
• The money goes directly to the other spouse's RRSP or RRIF, not to you first.
• A separation agreement is unenforceable unless it is made in writing, signed by the parties and witnessed.

A separation agreement can cover property, support and parenting. A court may set aside an agreement, or part of it, if a party failed to disclose significant assets, debts or other liabilities, did not understand its nature or consequences, or on contract-law grounds. Full disclosure of every RRSP is therefore in everyone's interest.

Spousal RRSPs and attribution

A spousal RRSP is one where one spouse contributes and the other is the annuitant. Normally, when the annuitant withdraws money, the contributor may have to include the amount in income, up to what the contributor paid in that year or the two preceding years.

That attribution rule does not apply if, at the time of the withdrawal, the spouses are living separate and apart because of the breakdown of their marriage or common-law partnership. Other exceptions include the year of the contributor's death and where either spouse is a non-resident.

Whether a particular withdrawal is taxed, and to whom, depends on your facts, so check with an accountant before taking money out.

The deadline for an equalization claim, and what to do next

A claim for equalization must be brought by the earliest of three dates: two years after a divorce or nullity judgment, six years after separation with no reasonable prospect of resuming cohabitation, or six months after the first spouse's death. The court may extend the time if there are apparent grounds for relief, the delay was in good faith, and no one will suffer substantial prejudice. Do not count on an extension.

• Write down your separation date and what supports it.
• Gather recent statements for every RRSP, including any spousal RRSP, as of that date.
• List other property and debts so net family property can be worked out.
• Ask a lawyer to confirm how the transfer should be worded in your order or agreement.
• Ask an accountant about the tax reporting for your situation.
• Note the equalization deadline and diarize it.

Frequently asked questions