RRSP Roll-Over

[Canadaguy]

How are RRSP's equalized? For example, if I have $500,000 in RRSP's at the time of separation and she has $250,000, can I do a one time RRSP roll-over in the amount of $250,000 to equalize? Or do I do less or more because of the tax she will pay when she takes out that $250,000 when she retires later in life.

I don't have $250,000 in cash to give her, so if I take it out of my RRSP's, I will get hit on taxes huge. Do I take the tax hit or her, or do we share that loss? Why not just do a roll-over to her name to avoid that loss? But then she pays tax on it later in life, which she doesn't want asking me to pay more than $250,000. So what's legal?

Our pre-nup has me bringing in $200,000 and her $100,000 at the time of marriage. We had equal investments because I had $0 TSFA and she had $100,000 TFSA. So how do we include that in the calculation with RRSP gains over the years and with us not starting at the same amount?

[Challenger]

You can roll RRSP to her if she agrees. If she doesn’t, you’d need to estimate how much your income tax will be when you retire (a letter from your financial institution is a good start), and depends on your age, income and contribution. Say you will mutually agree on 25%. Then say you have to equalize 250K, in the equalization you write 62.5k minus if you keep your RRSP. From what I heard you can’t force her to accept roll RRSP, even though in many cases it is beneficial to both sides.

Do not blindly accept offer from your lawyer or her lawyer - do actual tax estimate, talk to accountant. In some cases 25% is a gift, in some it is a robbery if you expect to have big portfolio and still young.

[rockscan]

You need to speak to a financial expert on value of the RRSP and what she gets. Do not simply value it yourself. There is a calculation for it. How do I know? My husband had to go through this in his divorce. Investments are not straight x to x. There is a cash value to them versus the investment value.

As for transferring it, yes it can be transferred without tax impacts. The bank will do this.

But check with a financial person on the value before doing anything!!

[Rioe]

How are RRSP's equalized? For example, if I have $500,000 in RRSP's at the time of separation and she has $250,000, can I do a one time RRSP roll-over in the amount of $250,000 to equalize? Or do I do less or more because of the tax she will pay when she takes out that $250,000 when she retires later in life.

I don't have $250,000 in cash to give her, so if I take it out of my RRSP's, I will get hit on taxes huge. Do I take the tax hit or her, or do we share that loss? Why not just do a roll-over to her name to avoid that loss? But then she pays tax on it later in life, which she doesn't want asking me to pay more than $250,000. So what's legal?

Our pre-nup has me bringing in $200,000 and her $100,000 at the time of marriage. We had equal investments because I had $0 TSFA and she had $100,000 TFSA. So how do we include that in the calculation with RRSP gains over the years and with us not starting at the same amount?

Good news is that your math is wrong and you don't have to transfer as much as you thought. If you have $500k and she has $250k, you only need to transfer $125k to make it equal at $375k each. That ignores the whole issue of valuing an RRSP and including tax hits and whatnot, of course.

Other considerations:

You don't have to equalize each kind of asset perfectly as long as you both find the total division fair. Maybe you each keep your RRSPs as is, but you take $125k less value from the house than she does. Etc. For example, when my ex and I divorced, we didn't bother having our house and family business officially appraised/valued. We just guesstimated them as equivalent and each kept one.

Also, your prenup is going to have an impact on all this, and we don't know what that might be. This is where you need to consult your lawyer, but be wary, as some lawyers try to inflate their billing by being overly thorough. If you and your ex can both be happy with how you have divided things, don't bother nitpicking about tax implications.

Equalization is just math. Make a spreadsheet of values at marriage date and values at separation date, and in which name each asset is held. Account for what the pre-nup dictates. Subtract marriage date value from separation date value and see where things stand with your two increases in net worth over the marriage. Then calculate what amount needs to be transferred (HALF the difference) to make them the same. Negotiate who gets what to account for it.

This all depends on how much animosity there is with your ex, and who has lawyers insisting on perfection.

[Tayken]

Where there is a blast from the past. Hi Rioe.

[rockscan]

Where there is a blast from the past. Hi Rioe.

You beat me to it.

Hi from me too! Nice to see you stranger.