Death, Divorce and Bankruptcy
There is a wise old saying – “Hope for the best, but plan for the worst.” In other words, sometimes in life the unexpected can happen, including such things as death, divorce, and bankruptcy. The following section outlines the potential outcomes of these unexpected events, and how your RRSP accounts can be impacted by them.
Note: All three events create complicated circumstances for you and your RRSP account, and as a result you should seek expert advice on the best approach in dealing with any of these events and your RRSP account.
What happens to your RRSP savings upon your death really depends upon whether or not you have a designated beneficiary(s) in the account’s documents or through your will. If you have not designated a beneficiary for your RRSP account then the assets held in the account become the property of your estate and their distribution will be governed by your will.
In this scenario, the Canada Revenue Agency (CRA) treats your RRSP as though you withdrew all of the assets from the account just prior to your death. As a result, the value of your RRSP account is treated as income received immediately prior to your death and it is included in your Date of Death Income Tax Return.
As discussed in our Designating a Beneficiary section, if you have a surviving spouse or common-law partner and they are a beneficiary under your will, your executor still retains the ability to shelter a portion or all of your RRSP assets by electing to have your RRSP assets transfer into their Individual/Spousal RRSP account.
Divorce / partnership breakdown
Experiencing a separation or divorce is a very stressful and complicated process. Once you and your spouse or partner have agreed upon the division of property, that agreement may include the transfer of a portion or all the RRSP accounts.
Amounts held in your RRSP can be transferred, without any income tax consequences, to an RRSP for your former spouse or common-law partner provided that certain conditions have been met including the following:
- The transfer must be made directly between the RRSP plans.
- Your former spouse or partner is 71 years of age or younger. If they are older, the transfer will be from your RRSP directly into a RRIF plan.
- You and your former spouse or partner are living apart and separate.
- The transfer is the result of a decree, order or judgment, or a written separation agreement between you and your former spouse or partner.
In addition, in the event of the breakdown of the relationship, your spouse can make withdrawals from a Spousal RRSP, to which you have contributed, without causing any attribution of the withdrawal to your income. Therefore, the normal attribution rules that normally apply to Spousal RRSPs are relaxed as a result of the breakdown of the relationship.
For RRSP transfers resulting from the breakdown of a marriage or common-law relationship you would use the Canada Revenue Agency (CRA) form T2220 – Transfer From An RRSP To Another RRSP Or RRIF On Breakdown Of Marriage Or Common-Law Partnership.
In addition, you should also review your current Beneficiary Designations to ensure that they fully support your estate plan.
In the event of bankruptcy, the federal Bankruptcy and Insolvency Act (BIA) govern your rights and those of your creditors. Effective July 7, 2008, the BIA was amended to give Registered Retirement Savings Plan, Registered Retirement Income Fund and Deferred Profit Sharing Plan annuitants facing bankruptcy protection from their creditors. The Act does not restrict the amount of assets protected from creditors, but the account is still subject to a claw-back on contributions. The claw-back provision allows the bankruptcy trustee to claw-back any contributions you have made to your RRSP during the 12 months preceding the date you declared bankruptcy.
Because the BIA governs your rights from a federal perspective, it is important to consult your provincial bankruptcy and creditor protection legislation as they may impact your rights during and after bankruptcy.
The BIA does not protect you from claims against you from your children or ex-spouse where enforcement of support and maintenance orders are in place. Nor does it cover claims against you arising from a lawsuit.
In addition, if you have previously withdrawn funds from your RRSP under the Home Buyer’s Plan (HBP) and subsequently become bankrupt, the Canada Revenue Agency (CRA) will continue to follow the rules for the repayment of the funds withdrawn. This obligation is not eliminated with bankruptcy. If the annual repayment is not made, the CRA will include the payment amount in your taxable income for that year.
For more information on RRSPs check out the following pages: