What Happens to Your TFSA in an Ontario Divorce?

You may have built up a TFSA in your own name and wonder whether your spouse has a claim to it. Or you may be the spouse who never held one and want to know whether your partner's TFSA is part of the picture. Because the account is in one person's name, it is easy to assume it stays with that person.

In Ontario, property division on separation is based on equalization, not on whose name is on the account. This article explains how a TFSA fits into that calculation, when an exclusion might be argued, and how to move TFSA money between spouses without creating a tax problem.

How equalization works

Equalization compares each spouse's net family property at separation with that spouse's net family property at the date of marriage. The spouse with the larger net increase pays half of the difference to the other spouse. Debts are subtracted from the value of property.

This means equalization is a payment to even out growth during the marriage. It is not usually a matter of splitting each account down the middle. A spouse with a large TFSA and a large mortgage, for example, may end up with a small net figure.

Is a TFSA divided or excluded?

The Ontario government's property page lists retirement savings and tax-free savings accounts among the property counted in the equalization calculation. It does not list TFSAs among the excluded property. So, as a starting point, the value of a TFSA is counted in your net family property.

The excluded categories are narrow. They are property other than the family home that was inherited or received as a gift from someone other than your spouse during the marriage, insurance money received because someone died, personal injury money, and property the spouses agree in writing to exclude.

What if the TFSA was funded with an inheritance or gift?

Because inherited or gifted property can be excluded, some people argue that a TFSA funded with inheritance money should also be excluded. Whether that works depends on the facts of your situation. The record-keeping matters, so a lawyer can tell you how it applies to your accounts.

There is a warning in the other direction. The Court of Appeal for Ontario has held that gifted or inherited money put into a matrimonial home loses its exclusion, and that money that went into the matrimonial homes early in the marriage lost its status as excluded assets. That decision concerned a home, not a TFSA, but it shows that moving excluded money into something shared can change its treatment.

Valuation dates

Property you own at separation is valued as of the separation date, and property you owned at marriage is valued as of the wedding date. For a TFSA, that usually means gathering statements showing the balance on both dates. If you cannot find the older statements, the financial institution can often provide them, so ask early.

Be careful about online claims that a TFSA is discounted for tax in the calculation. How a TFSA is valued is something to confirm with a lawyer rather than assume.

Transferring a TFSA between spouses

If equalization means one spouse should receive TFSA money, the way it is moved matters. The CRA says a direct TFSA transfer between spouses on breakdown does not affect either person's contribution room. It qualifies only if the spouses are living separate and apart at the time of the transfer, and the transfer is made under a court decree, order or judgment, or under a written separation agreement.

A qualifying transfer is not treated as a withdrawal, so no contribution room is added back the next year. If one person withdraws the funds and the other contributes them, the contribution counts against the receiver's room and may cause an over-contribution. An over-contribution is taxed at 1% per month on the excess, and withdrawing from one TFSA and contributing the money elsewhere counts as a new contribution.

• Do not simply withdraw and re-deposit money between spouses.
• Make sure the transfer is written into a court order or a written separation agreement.
• Ask the financial institution how it handles a direct transfer request.

What to do next

There is a time limit for a property claim. You must go to court within six years from the day you separated or two years from the day your divorce is final, whichever comes first. Do not wait if property is a concern.

• Collect TFSA statements for the date of marriage and the date of separation.
• List all other accounts, property and debts for the same two dates.
• Note the source of any money that came from a gift or inheritance.
• Do not move TFSA money between spouses until you know how to do it as a direct transfer.
• Speak with a family lawyer or accountant about your own numbers.

Frequently asked questions