Tax Rate Question

[mememe]

The X makes nearly 3 x I do and his lawyer, under part 5 Debts and Other Liabilities says the tax on his rsp is 27.6%

My statement has a tax rate of 34.3

Strangely, his lawyer mixed up his income for mine and said I made more than him. She then stated that my tax rate for the pension should be 27.6% (so he would get more of my pension). The actuary differed with her on that.

Is it to my advantage/disadvantage that he has put this tax rate down?

[Mess]

If I'm clear, you are doing some or all equalization by transferring RRSP.

The 27.6% is a standard amount that the bank withholds when an RRSP is cashed in. Neither of you is cashing in at this time - if I understand you correctly - but the tax rate is considered so that the actual value of the funds transferred may be determined.

These are not based on your actual tax rate, it is set rate that the bank applies based on the size of the RRSP being cashed in. If you are cashing in a small amount they withhold around 22%, if it is the larger amount, they withhold 27%

Since you may or may not cash in the RRSP immediately, there is no way to absolutely determine the after tax value of the amount, so this tax withholding is what is used. Just to be clear, it is the same as the tax that is withheld from your paycheque and is noted on your T4. If your income is low and your marginal tax rate is much lower, then you would get a refund. The actual tax you pay depends on your income that year, and will change from year to year.

So now let's answer your question. Say he is to transfer $100,000 to you in equalization and is doing it through a spousal RRSP transfer. He would have to transfer $127,600 in RRSP funds to make up for the tax owed. In other words, $127,600 in RRSP is only considered to be $100,000 in cash value.

If he is to transfer $1000 in equalization, then he would transfer around $1220 (I forget the exact percentage.)

If your actual marginal tax rate is lower than 27.6%, and you intend to cash in the funds right away, then the higher rate is to your advantage, because he is transferring a larger sum.

If you are the one making the transfer, then of course the high rate is to his advantage. But keep in mind that this is a standard method of calculation, as far as has been explained to me by my lawyer; it is what a judge would use in the courtroom.

[mememe]

We are just doing the financials and it is for the purposes of equalization. I don't think either of us will be cashing in the RSP's to equalize. So now who is advantaged?

[Moolight]

When we did our equilization the actuary predicted our tax rate base on the revenue from pension and RRSP.

it is to your advantage if your ex put his low and yours is high but according to what you are mentionning your is quite high. We both agree to a specific tax rate and that was deducted from our assets. Due to my pension, mine was predicted to be higher than my ex.

You can assess your tax rate by using this calculator and you will see that having a 34% tax rate may be a bit too high.

Canadian Income Tax Calculator 2013 | Life Insurance Canada

[Moolight]

We are just doing the financials and it is for the purposes of equalization. I don't think either of us will be cashing in the RSP's to equalize. So now who is advantaged?

You do not have to cash out your RSP or pension as this is only calculation for the purpose of equalization. While we included our predicted tax rate, neither of us cash out anything.

[mememe]

Thanks so much. This is quite helpful. For my pension, valued at a significant sum, I would like the higher tax rate. Because I have a pension, I don't have much in my RSP--so using the higher tax rate there doesn't have such an effect on me. His lower tax rate--hopefully does. Thanks again for lthe quick reply.

[Mess]

You don't have to cash it out, but you do have to determine what the cash value is today. That cash value is the amount you would be left with if you cashed it out today. The rate you pay in 20 years is not relevant to this question.

Today he is to transfer $100,000 to you. If it is RRSP, then $100,000 is only worth $72,400, using the rate that the bank withholds on that amount.

If you were in court, the judge would just apply that amount in order to simplify his math homework. The law clerk working on my file explained it to me that way, and that these withholding rates are generally used.

That being said, the actual value of the RRSP transfer is based on your actual marginal tax rate for this year. It is fair to insist on this calculation.

[mememe]

That is very helpful information. So, to make sure I have it right--to get a value of your RSP for equalization you pretend you are cashing in your RSP and what is the value based on your tax rate.

So, is the value for equalization and tax rate for the day of valuation ? correct? or are you suggesting today's value and today's rate.

If it is the latter--the problem is know the exact day we are looking at our assets (RSP in this case) so we get a true value.

[DowntroddenDad]

I tried to make the arguement for the higher tax rate and failed.

The standard is to use the quoted tax rates, as that is the expected rate when you retire and start to withdraw funds.