FAMILY LAW AND YOUR RRSP WHEN YOU GET DIVORCED
I want a divorce, is the last thing anyone wants to hear because everything from possessions to investments is included when you get divorced.
A recent email question from a Canadian Budget Binder reader prompted me to seek out advice from Gary Gorr a Canadian Financial Advisor.
In short, the reader was getting divorced and was concerned about his investments and how they would be divided between each spouse or if they would.
RRSP Entitlement When Getting Divorced In Ontario
Dear Mr CBB,
“Do I have to Share my RRSP with my Spouse When I get Divorced”?
Thanks for your question Matt as I will keep my response brief in hopes you get the answer you are seeking.
Family Law Act Ontario
In Ontario, we have rules that we have to abide by when there are divorce proceedings and they fall under the Family Law Act.
Going through a divorce procedure can be tedious and takes time which is why hiring a lawyer right away is critical.
In simple terms all property acquired after the date of marriage, up until the time of marriage breakdown is deemed to be the property of both parties.
The ownership of the property is not a factor.
So, in short, each person is entitled to 50% of the total family property no matter what the reasons for divorce are.
There are certain exceptions like the family home that was brought into the relationship or received as a gift or inheritance.
However, to keep things simple we will ignore this.
Getting Divorced and Your Investments
Any investments such as RRSP’s, Stocks, Bonds, Pensions, are all subject to being included under Family Law.
So if one spouse had a significant RRSP and the other nothing then the spouse with nothing would be entitled to 50% of the spouse’s RRSP.
The courts adjust the value of the RRSP down, by the amount of withholding tax that would be payable if the RRSP were cashed in.
What is a withholding tax?
A withholding tax is the amount of money an employer takes off of an employee’s paycheque and hands it over to the Canada Revenue Agency (CRA).
So the figure used is less than the fair market value of the RRSP.
Related: How to calculate your net worth?
What is Net Family Property?
To understand this fully the courts ask each person for a statement of assets and liabilities at the time of marriage and time of marriage breakdown.
In effect, they are doing a net worth statement at two points in time.
This is known as net family property (NFP) and the spouse with the RRSP would include it as part of their NFP.
The spouse with the higher NFP would then be required to make an equalization payment to the other spouse so that both share 50-50.
This payment does not have to come from the RRSP or a transfer of the RRSP to settle the payment obligations.
It can actually come from any assets owned by the individual with the higher NFP.
Seek Family Law Advice When Getting Divorced
Hopefully, this gives you some insight on your question about an RRSP and Divorce.
To learn more about Family Law, Division of Assets and calculation equalization payments visit Feldstein Family Law Group.
Every attempt has been made to be accurate but Errors and Omissions Excepted.
Discussion Question: What happened when you got divorced with your RRSP investments?
Share your comments below to help others going through a similar situation.
Guest Post: Gary Gorr