RRSP

RRSP & Divorce; hidden wealth

As a financial advisor, I could never agree with ubiquitous RRSP propaganda in Canada. I always spent time educating my clients about the pros and cons of this program. However, when it comes to a property division due to a divorce, registered retirement savings plans represents a huge opportunity for spouses with different marginal tax rates. So huge, that you sometimes wish to divorce just for the sake of it.

The trick is that there is NO attribution rule on spousal RRSP rollover (not to confuse with spousal RRSP), if it is done pursuant to a court order or written separation agreement using CRA Form T2220 (check: http://www.cra-arc.gc.ca/E/pbg/tf/t2220/README.html).

In my practice as a divorce financial analyst, I always make sure to show clients all possible tax savings that divorce-driven RRSP split can have. Whether done by tweaking your existing accounts or creating the new ones, this valuable opportunity should never go unnoticed. After all, thousands of dollars can be saved on both ends of a separating union.

Spousal RRSP to fund equalization payment in Divorce:

Thomas is earning $100,000/yr (43.41% MTR) and his wife Sandra works part-time in the local town library earning $30,000/yr (20%).

Thomas has to pay Sandra an equalization payment of $25,000 pursuant to a Separation Agreement; however he has no cash and does not want to sell his stocks as it will trigger a capital gains tax.

Thomas has room on his RRSP and decides to do a spousal RRSP contribution to Sandra at the grossed up rate or her current marginal tax rate to make it fair. This comes to $31,250. This way after 20% tax, Sandra would be netting $25,000.

To make things more interesting to Sandra, Thomas is making a $35,000 RRSP contribution and Sandra is happy to accept it. Thomas’s MTR of 43.41% allows him to phase out the deduction into several years to get just that; 43.41% tax deduction or $15,193, what in turn makes his cash outlay for equalization payment $19,806.

Also, he secures an RRSP loan with the bank at (!) prime rate, which makes it so much more attractive than drawing his credit cards to the ground, incurring 18% cost and downgrading his credit score.

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