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Financial Issues This forum is for discussing any of the financial issues involved in your divorce.

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Old 10-20-2010, 12:07 PM
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Default taxes on equalization payment?

Our net family property statements say that I should receive XX sum but the draft separation agreement has another number and says:

the equalization shall be paid by means of spousal rollover pursuant to the income tax act from the RRSP holdings and that in order to effect the transfer, the equalization payment shall be grossed up for taxes as enumerated in the net family property by 25%.

My questions are as follows:

A) Is tax paid on equalization payments? This doesn't seem right to me, particularly when the majority of the equalization is as a result of equity in the matrimonial home. It's not a capital gain.

B) We don't have this kind of money in RRSPs and it was my exes intention to re-mortgage the house in order to provide me with the equalization. Can anyone who has been through this explain how the transfer of funds from one spouse to the other happens? Is it through RRSPs and if not, it's treated as taxable income? I'm confused and would rather not pay our mediator to explain it to us.

Thanks.
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Old 10-20-2010, 12:15 PM
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The reason the equalization payment is to be grossed up by 25% if made in the RRSP is that the spouse withdrawing the money in the future will have to pay tax on the withdrawal. The transfer between spouses right now is a tax free transfer. It's the future withdrawal that is being tax effected.

e.g. equalization payment is $50K. If done via RRSP spousal transfer on breakdown of marriage (done with this form T2220 - Transfer from an RRSP or a RRIF to Another RRSP or RRIF on Marriage Breakdown or Common-law Partnership) then the amount to be transferred will be $66.67K which is a 25% gross up to a/c for the taxes the spouse receiving the money will have to pay when he/she withdraws it.

If the equalization payment is made outside the RRSP (as in by refinancing the house), the spouse just pays the other $50K in my example. It is a tax free payment.
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Old 10-20-2010, 12:18 PM
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Thanks that's very helpful. It is my exes intention to re-finance the house so we need to have the separation agreement amended to reflect this.
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Old 10-21-2010, 08:44 AM
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Quote:
Originally Posted by dadtotheend View Post
The reason the equalization payment is to be grossed up by 25% if made in the RRSP is that the spouse withdrawing the money in the future will have to pay tax on the withdrawal. The transfer between spouses right now is a tax free transfer. It's the future withdrawal that is being tax effected.

e.g. equalization payment is $50K. If done via RRSP spousal transfer on breakdown of marriage (done with this form T2220 - Transfer from an RRSP or a RRIF to Another RRSP or RRIF on Marriage Breakdown or Common-law Partnership) then the amount to be transferred will be $66.67K which is a 25% gross up to a/c for the taxes the spouse receiving the money will have to pay when he/she withdraws it.

If the equalization payment is made outside the RRSP (as in by refinancing the house), the spouse just pays the other $50K in my example. It is a tax free payment.

Not my post, but my situation. Thanks for the info. I was told at the time figures were being discussed, that my amount, as the spouse receiving the payment, would be "reduced" by 25% to cover the taxes ex would have to incurr. It didn't seem right to me that I'd have to cover his tax costs as well as pay for mine upon withdrawal. I printed off your response to show my lawyer. It sounds much more logical to me. The way it was presented to me I was going to have to pay taxes twice on the one amount. You'd think lawyers would be more informed about these things!!
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Old 10-21-2010, 12:04 PM
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Don't for one second think that lawyers know all. They are just highly educated and trained in a specific area of expertise that pays well. That doesn't qualify them as experts in ancillary matters like the tax effect of these transactions.

My $425/hour lawyer didn't know some specific nuances about equalization either and I had to give him my take on the situation for around 40 minutes (you do the math on what that cost me ) one time and he still didn't get it. I operated for almost a year on the wrong conclusion on this issue until I finally figured that out that I was indeed right.

Buyer beware dude.
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Old 10-21-2010, 12:11 PM
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Sounds to me like you are talking about two different things.

Do I have this right? .....

To come up with Net Family Assets for equalization - you reduce the RRSP amount by 25% to account for its after tax value.

BUT - when the equalization payment actually takes place - IF - the equalization payment is being made by transferring RRSP's - THEN - the value of the RRSP to be transferred has to be grossed up by 25% to come up with the after tax amount?
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Old 10-21-2010, 01:10 PM
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Yes you have that right.
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Old 10-21-2010, 01:26 PM
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So, if we're talking about an amount of $50,000 (as per your example), then it is at first reduced by 25% to an amount of $37,500 to meet the tax requirements. Split that ($18,750.00) and add 25%, so spouse would end up with $18750 + 25% of which amount? The $37,500.00 or the $18,750.00? Would the final payout be $23,437.50 or $28125.00. Just so I get this straight in my head...Is the formula [(50,000.00 - 25% )/ 2] + 25% or is it (50,000.00 - 25% / 2) + (50,000.00 - 25% x 25%)??
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Old 10-21-2010, 02:05 PM
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No, that's not right.

When calculating your net family property (NFP) the RRSP asset is reduced by the expected taxes on withdrawal.

Once you equalize family property and agree on an equalization payment, if that payment is to be made with RRSP funds on a tax free spousal transfer using the form I linked above, that is when the equalization payment is grossed up for the taxes to be paid by the spouse receiving the RRSP money when he/she withdraws it.
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Old 11-15-2010, 06:27 PM
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Sorry to join this thread so late but I have a quick question. Let's say I wanted to do a straight equalization of RRSPs. For example, Let's say I have 40K in RRSP's and my spouse has 20K...would we have the option of me transferring 10K into her RRSP directly so we each had 30K and be done with it. Then we could equalize the rest of our assets without worrying about the tax implications of the RRSP.
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