I was reviewing a client’s portfolio when out of the blue he told me he and wife were getting separated and wanted to know the mechanics of a RRSP equalization payment. Unlike other assets (bank accounts , stocks , bonds and real estate) RRSP’s are registered with the federal government and any de-registration is a taxable event to the owner, it gets added to their income the year the money is taken out. So in the event of a Divorce it is very important that an equalization payment be done properly or it can be very costly.
Here is a simple example of the right and wrong way to do it .
Meet Mark and Betty
Betty’s income: $250,000
Mark’s income: $175,000
Mark has $175,000 in his RRSP and Betty has $325,000 in her RRSP on the valuation date. It is agreed that Betty will make a payment of $62,500 to Mark in order to make both RRSPs have the same value .
Example 1 (The wrong way)
Betty takes out $62,500 out of her RRSP and gives it to Mark.
This will result in Betty adding $62,500 to her income bringing her income to $262,500 and she will have to pay 50% in taxes on her withdrawal (today’s highest rate in Ontario) The net result would be a $31,750 tax bill for Betty.
Example 2 (The right way)
Betty fills out a T2220 form and instructs her advisor to transfer $62,500 from her RRSP to her spouse’s RRSP. This ensures that the money stays within the RRSP tax shelter. It is also very important to note that Mark does NOT get a tax-deduction nor does it affect Mark’s contribution limits for any year. The net tax result is 0 for Betty.
Please feel free to contact me to discuss your individual situation so that we can create your individual solution.
Vice President & Investment Advisor
RBC Wealth Management RBC Dominion Securities Inc.