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Dealing with RRSPs and LIRAs

RRSPs, LIRAs 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, LIRAs 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, LIRAs 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.