CIBC Private Wealth
January 07, 2021
Undoing ‘I do’
‘I do’. These are two small words that carry big responsibility—whether formally or informally declared. And, as much as we like to think that love conquers all, the reality is that sometimes things don’t work out. If you’re going through a relationship breakdown or know someone who is, it’s important to consider what you need to do if you have registered investments.
As assets of a relationship are divided, some or all of the property in a registered plan may need to be transferred to the other spouse or common-law partner. Even where this doesn’t occur, if a registered plan remains in place, you may need to address some challenges. Let’s look at these issues in the context of commonly held registered plans.
What to do with retirement savings?
In a relationship break down, amounts from Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) can be transferred to your spouse’s or common-law partner’s RRSP or RRIF. You can make the transfer using Canada Revenue Agency’s Form T22201. There are strict rules around this; it’s important you follow them to create a “rollover” for tax purposes - so the transfer is not treated as a taxable withdrawal by the payor; and the recipient can have the funds end up in their plan without having made an over-contribution.
- You have to transfer the funds directly to your spouse’s or partner’s plan without sending the funds to yourself first. If the payor doesn’t make the transfer directly, then you’ll have to include the amount received in income, and the funds won’t be able to be transferred on a rollover basis.
- The transfer must be made according to a court decree, order or judgment, or under a written agreement relating to a division of property between you and your spouse or partner, in settlement of rights arising from the relationship breakdown.
- If you’re transferring money to an RRSP, your spouse or partner must be 71 years of age or younger at the end of the year that the funds are transferred.
What if your existing RRSP or RRIF is a spousal or common-law partner plan? With this type of plan, you’re the annuitant but your spouse or partner contributed the funds and claimed the tax deduction when the contributions were made. Consider an RRSP or RRIF that is a spousal or common-law partner plan. If withdrawals are made in the three calendar years after a contribution is made to any spousal or common-law partner RRSP, some or all of the withdrawal will be attributed and taxable in the hands of the original contributor. For couples who are separated or divorced, however, this attribution rule no longer applies.
Any potential tax implications on a TFSA?
You may also transfer funds from your TFSA to your former spouse’s or partner’s TFSA without it being considered a contribution by your former spouse or partner. Again, the transfer must be made directly from your TFSA to your former spouse or partner’s TFSA. If the money is first received by your former spouse or partner, who then contributes it on their own to their TFSA, it will be treated as a regular TFSA contribution. This means it’ll reduce their TFSA contribution room and potentially result in an overcontribution tax. Note that the transfer will not be considered a withdrawal by you so it would not be added back into your contribution room. Just like with RRSPs and RRIFs, the direct TFSA transfer must be under a decree, order or a written separation agreement relating to a division of property on relationship breakdown.
RESPs—are the kids covered?
Consider these points when it comes to Registered Education Savings Plans.
- You and/or your spouse or partner may be the joint subscribers of an RESP on which your child(ren) are named as the beneficiaries.
- If you and your spouse or partner were joint subscribers of the RESP, the arrangement can continue.
- You may be able to transfer the property from one RESP to another RESP if the plans have a beneficiary in common or if one of the beneficiaries from each plan are siblings.
- A spouse or partner can become the subscriber under a plan and replace the original subscriber in the event of a relationship breakdown between them.
If you and your spouse or partner are subscribers under separate RESPs for the same beneficiaries, be sure to coordinate future RESP contributions to make sure you’re not exceeding contribution limits.2
It’s important to speak to a professional when dealing with financial matters due to a relationship breakdown. A simple oversight could be costly and incur hefty taxes.
1 See Form T2220 Transfer from an RRSP, RRIF, PRPP or SPP to Another RRSP, RRIF, PRPP or SPP on Breakdown of Marriage or Common-law Partnership.
2 Contribution limits are per beneficiary, not per plan.
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.