RRSPs and Divorce in Ontario: How They Are Divided

For many separating couples, an RRSP is one of the largest assets. Two questions come up quickly: how does it count when property is divided, and can money move from one spouse to the other without a tax bill?

The answers depend on Ontario's Family Law Act and on federal tax rules. This article walks through the basics so you know what to ask before you sign anything.

How an RRSP counts in equalization

In Ontario, married spouses do not simply split each asset. The spouse whose net family property is smaller is entitled to one-half of the difference between the two spouses' net family properties. Net family property is the value of property a spouse owns on the valuation date, minus debts and permitted deductions, and is never less than zero. RRSPs and pensions are counted as property.

So an RRSP in your name is not necessarily handed over. Its value goes into your net family property, and the final figure is an equalization payment. Whether that payment is made in cash, other assets or an RRSP transfer is something spouses can negotiate.

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 for property. The value of your RRSP on that date is what is generally used, not its later value.

The tax rules also look at separation. They use the test of whether you are living separate and apart. If you and your spouse are still under one roof, the date can be disputed, so it is worth getting advice.

Exclusions and unfair results

Some property is excluded from net family property. This includes gifts or inheritances from a third party received after the marriage (other than a matrimonial home), personal injury damages, life insurance proceeds, and property excluded by a domestic contract. The person claiming an exclusion must prove it. Records of where RRSP money came from can therefore matter.

The court may award more or less than half the difference if equalizing would be unconscionable. That is an exception, not the usual outcome.

There are time limits. An equalization claim must be brought by the earliest of 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.

Moving RRSP money tax-free

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. This requires that they are living separate and apart and that the transfer is made under a court order or a written separation agreement dividing property on the breakdown of the relationship. The CRA reports this transfer on Form T2220.

• The transfer should go directly between the plans, not through your bank account.
• A written separation agreement must be in writing, signed by the parties and witnessed to be enforceable.
• The agreement or order should clearly say that RRSP funds are being transferred as part of dividing property.

A tax professional can confirm how the transfer will be reported and what happens to the plan's tax treatment.

Spousal RRSPs and pensions

Spousal RRSPs have a special rule. When the annuitant spouse withdraws from a spousal RRSP, the contributor may have to include the amount in income, up to what the contributor paid in that year or the two preceding years. This 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.

Pensions follow different rules from RRSPs. For a Pension Benefits Act plan, the imputed value for family law purposes is set under that Act, and an order may provide for an immediate lump-sum transfer out of the plan. A lump sum of more than 50 per cent of the imputed value has no effect to that extent.

What to do next

• Collect RRSP statements showing the value on the date of separation.
• Write down the date you believe you separated, and why.
• Gather records for any gift, inheritance or other excluded property you plan to claim.
• Ask a lawyer and an accountant how a transfer would be documented and reported.
• Do not withdraw funds before getting advice, because tax may apply.
• Keep track of the time limits for an equalization claim.

Frequently asked questions