How are my RRSP, TFSA, and CPP divided in a divorce? How do we calculate the amount? Here is the answer that you want to know
Pension and other types of retirement savings are very valuable assets. You worked hard to save for your future, and now your separation makes it feel like your financial plans are in jeopardy. You may have brought a pension into the relationship or made significant contributions to a Registered Retirement Savings Plan (“RRSP”), Tax-Free Savings Account (“TFSA”), and Canada Pension Plan (“CPP”) throughout your marriage or cohabitation. On separation or divorce, how are those assets divided? I recently answered some general FAQs on the topic of dividing a pension during divorce. Today’s post will look more in depth at the more specific issue of how RRSP, TFSA, and CPP credits are divided.
Calculating the equalization payment on divorce
The general presumption under BC divorce law is that “family property” and “family debt” should be equally divided, unless the spouses agree otherwise (e.g., a cohabitation agreement, prenuptial agreement, marriage contract, or separation agreement).Family property is any property—other than “excluded property”—that is owned on the date of separation, whether it is in one spouse’s name or both spouses’ names. On separation and divorce, division of property is typically dealt with in this way:
(1) Each spouse makes a list of all of their family property and debt, including values for each (see below for how values are determined)
(2) The value of each spouse’ property is added up, then the amount of each spouse’s debt is subtracted out. This bottom line is each spouse’s “net family property.”
(3) Net family property amounts are compared, and the spouse with the higher total must pay half of the difference to the spouse with the lower total. This is called an “equalization payment.”
How to calculate and divide an RRSP or TFSA on divorce
The value of registered savings and income plans (RRSPs, RRIFs, and LIFs) and TFSAs are included in calculating the value of your net family property. However, it is important to understand that only the growth between the date of marriage and the date of separation is counted. Any amounts that you accumulated in your RRSP or TFSA before the date of marriage are yours alone and not subject to division. For that reason, the first step to dividing an RRSP or TFSA is to determine values on those two dates: your date of marriage or date of cohabitation, and your date of separation. In many cases, this can be done relatively easily, by obtaining account statements showing the balance on each of those pivotal dates. Because an RSP is a pre-tax asset it us usually dealt with through a transfer to another RRSP and not by cashing it out.
It may be that the more advantageous option is for the spouse with the higher net family property to transfer funds from their registered account into their spouse’s registered account. The CRA allows one spouse to make a tax-free roll-over to the account of the other spouse pursuant to a separation agreement or court order, which does not impact the contribution room of either spouse. In other cases, it may make more sense to liquidate a different asset (e.g. real property), or take out a loan/mortgage to fund the equalization payment while leaving RRSPs and TFSAs untouched. An experienced divorce lawyer can help you determine what documents you’ll need to obtain, what documents your spouse needs to produce to you to prove the value of their RRSPs and TFSAs, and how best to equalize them.
How CPP is divided in a divorce
You may have noticed that I didn’t mention splitting CPP in the discussion so far. That is because there are different rules and a different process for splitting CPP pension credits on separation or divorce. If eligible for CPP credit splitting, either spouse can apply to divide contributions made throughout the course of their relationship. On receipt of the application, the government calculates contributions to CPP between you and your spouse on a year-by-year basis and divides them. CPP credit splitting can offer some benefits, including potential tax savings. It may help a spouse qualify for benefits and can help ease the financial strain of separation and divorce for the less-well-off spouse. But it does not make sense in all cases. Depending on a number of factors, dividing CPP credits may bring down the overall value of a spouse’s pension in an amount that exceeds the value received by the other spouse. To get a general idea of how credit split calculations work, see here: Divorce of separated, Splitting Canada Pention Plan credits (Pension is spelt wrong here)
To talk about whether CPP Credit splitting is recommended in your specific situation, reach out to our divorce lawyer in Prince George.
Divorce: RRSP, TFSA, and CPP division
At Dick Byl Law Corporation, we assist clients in Prince George and Northern BC during the challenging process of separation and divorce. Understanding your rights in a divorce is so important to ensuring a fair outcome that protects you and your financial future. Our divorce lawyer will work relentlessly towards getting the best for you. Book your appointment today.