This past week we had questions about how RRSPs and TFSAs are divided in a marriage breakdown. Recently, with more than 40% of marriages and common-law relationships ending in a break-up, here is some information for you to help your clients.
What happens to RRSPs and RRIFs during a marriage breakdown? Let’s consider a married couple where one has $100,000 in their RRSP and the other has a very small RRSP. Upon the breakdown, the RRSPs (and spousal RRSPs) are community property and can be split between the partners. Assuming a 50/50 split, the partner with the small RRSP can add $50,000 to their RRSP without having the available RRSP room. The same is true for RRIFs.
The mechanics of doing the transfer are quite simple, it works very much like an RRSP transfer, but instead of using a T2033, we use a T2220.
The T2220 is sent to the relinquishing institution, it requires signatures from both parties. If the relinquish-er won’t sign, a copy of the divorce agreement can be attached.
Regarding TFSAs, when there is a breakdown in a marriage or common-law partnership, an amount can be transferred directly from one individual's TFSA to the other's TFSA without affecting either individual's contribution room.
The transfer is a qualifying transfer and will not reduce the recipient's eligible TFSA contribution room. Interestingly, since this transfer is not considered a withdrawal, the transferred amount will not be added back to the transferor's contribution room at the beginning of the following year.
Also, the transfer will not remove any excess TFSA amount, if applicable, in the payor's TFSA.
This division of the RRSP and TFSAs must be done in accordance with the terms of the divorce agreement.
While this isn’t the most pleasant topic, knowing how to handle these situations will be greatly appreciated by your clients.
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