Impact Of The New RRSP Rules On Separating Couples

Recent updates to Canadian Federal Tax Laws have been amended to allow a separating spouse the ability to withdraw funds from their RRSP without incurring a tax penalty, so long as the money goes toward the purchase of a new home. 

The Home Buyer’s Plan (HBP) 

The Home Buyer’s Plan (HBP) attempts to ease the transition for separating spouses to purchase their own homes in the years following separation.

Regardless of whether separating spouses were married or common-law partners, the separating spouse has the ability to withdraw from their RRSP in the year of separation, or the four (4) years following separation, without facing a tax penalty as was the case before the new law came into force on January 1, 2020.

Transitioning For Separating Spouses

Selling and purchasing new residences is a standard part of spousal separation and the new rules aim to ease the transition for separating spouses, particularly in the years immediately following separation. 

Funds withdrawn from RRSPs under the HBP must be repaid over a fifteen (15) year period, starting two (2) years after the initial withdrawal.

A separated spouse can withdraw funds from their RRSP before equalization (a division of marital assets) occurs, in order to obtain the tax benefit of the HBP. 

The money taken from the RRSP will still have to be accounted for in the equalization process along with the proportionate share of the spouses’ tax benefit. 

Equalization Process

In the standard equalization process, both spouses have an equal entitlement to funds held in an RRSP, regardless of whose name the account is in. The HBP does not alter this process but instead provides a potential tax benefit to the spouse seeking to withdraw from the RRSP for the purpose of purchasing a new home.

Maximum Withdrawal

The maximum amount that can be withdrawn under the HBP is $35,000.00 and all of the funds must be put towards the purchase of a new home to be eligible for the tax benefit. 

The impact of this change will become clearer over time as courts begin hearing cases from spouses who have opted to benefit from these new HBP rules.

Contact Epstein Law 

For more information on this development, or if you have any other questions relating to your rights following separation, please contact us and one of our family lawyers will be happy to help.