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Dealing with RRSPs

RRSPs (both locked-in and not locked-in) and defined contribution pension plans do not need to be valued on marriage breakdown. This is because, unlike with a defined benefit pension plan, RRSPs and defined contribution pensions are simply tax deferred investment accounts and so the value at any point in time is equal to the account balance. For this reason, a valuation is not necessary to determine the pre-tax value for these assets.

However, in many cases, a proper income tax adjustment should be calculated. For more details on the reason for the income tax adjustment, see the question ‘Does the value of a pension have to be adjusted to reflect income tax?’ in our pension valuation frequently asked questions.

Often RRSPs and defined contribution pensions are adjusted based on a very rough estimate of the average tax rate in retirement, such as 20% or 25%. However, if the tax adjustment were more accurately calculated, it may be much lower or much higher. In addition, if the couple ends up in court, they won’t have any actuarial evidence supporting the income tax reduction. If a rough estimate of the income tax adjustment has been used, the court may not accept the adjustment.

For example, for someone who is currently 55 years old and has an RRSP of $150,000 with no additional investments, an actuarial calculation results in an income adjustment of about 10%. This results in after-tax value of $135,000. In contrast, using a rough 20% tax adjustment would result in an after tax value of $120,000, a difference of $15,000. In this case, this person’s spouse would have lost $7,500 during property settlement as the result of this approximate income tax adjustment.

In addition, it is important to consider the original source of the funds in the RRSP. If funds in the RRSP were originally from a defined benefit pension plan (which will typically be a locked-in RRSP) or a severance payment, the portion that is allocated to the period of marriage needs to be determined; if the person was a member of the defined benefit plan at the date of marriage, they did not have an account balance at that date but instead an accrued annual pension. If the severance payment happened after the date of marriage, there was no account balance at the date of marriage yet part of the severance payment may be the result of pre-marital years of service with the employer. In this situation, it is best to deal with this portion of the RRSP separately. The amount that is considered to be marital property is usually determined by prorating the value at the date of separation based on pre-marital and post-marital years of service.