Dividing RRSPs in a Prince Edward Island Divorce

RRSPs are among the most straightforward assets to divide in a PEI divorce — if you use the right mechanism. Transfer funds correctly using CRA Form T2220 and there's no tax hit. Do it wrong and you trigger immediate income inclusion at the transferring spouse's marginal rate.

RRSPs as Family Property

Under the PEI Family Law Act, RRSPs accumulated during the marriage are included in the net family property (NFP) calculation. The market value of each spouse's RRSP holdings on the separation date enters their NFP. If equalization requires a transfer from one spouse to the other, the RRSP balance can be physically moved.

The marriage-date value of any RRSP is deducted (the standard pre-marital deduction). Only the growth during the marriage — additional contributions and investment gains between the wedding and separation — is subject to equalization.

The Tax-Free Transfer: Form T2220

The Income Tax Act allows a tax-free transfer of RRSP funds between separated spouses when:

1. There is a written separation agreement or court order requiring the transfer
2. The parties are living separate and apart at the time of transfer
3. The transfer is made directly from one registered plan to another (RRSP to RRSP, or RRSP to RRIF)

CRA Form T2220 ("Transfer from an RRSP or a RRIF to Another RRSP or RRIF on Breakdown of a Marriage or Common-Law Partnership") authorizes the financial institution to process the transfer without withholding tax or triggering income inclusion.

Without Form T2220: If you simply withdraw RRSP funds and hand cash to your spouse, the full withdrawal is included in the transferring spouse's taxable income for that year — and the receiving spouse doesn't get any RRSP room for it. A $50,000 "helpful" withdrawal could cost $20,000+ in unexpected taxes.

How the Transfer Works in Practice

1. Your separation agreement or court order specifies the dollar amount to transfer
2. Both spouses complete Form T2220 (the transferring spouse signs Part 1, the receiving spouse signs Part 2)
3. Submit the form to the financial institution holding the RRSP
4. The institution transfers funds directly to the receiving spouse's RRSP or RRIF
5. No tax is withheld, no income is reported, no RRSP contribution room is used

The receiving spouse now holds the funds in their own RRSP. It's taxed normally when they eventually withdraw it in retirement.

Valuation Date Matters

RRSP values fluctuate daily with market conditions. The separation date locks in the value for equalization purposes. If your spouse's RRSP was worth $120,000 on the separation date but dropped to $95,000 by the time you negotiate the agreement, the equalization calculation still uses $120,000.

This means the actual transfer amount may need to be adjusted. If markets have moved significantly between separation and the transfer date, you'll need to decide whether to transfer a fixed dollar amount (as per the equalization calculation) or a percentage of the current balance.

Spousal RRSPs

Spousal RRSPs — where one spouse contributed to an RRSP in the other's name — have additional tax rules. If a spousal RRSP is withdrawn within three calendar years of the last contribution, the withdrawal is taxed as income to the contributing spouse (the "three-year attribution rule").

On marriage breakdown with Form T2220, this attribution rule doesn't apply. The transfer is tax-neutral regardless of when the last spousal contribution was made. But if the receiving spouse withdraws the funds shortly after the transfer (rather than keeping them registered), normal RRSP withdrawal rules apply — the withdrawal is their taxable income.

TFSAs and Other Registered Accounts

Tax-Free Savings Accounts (TFSAs) are also included in NFP at their separation-date value. Unlike RRSPs, TFSA transfers on marriage breakdown don't require Form T2220 — the funds can be transferred without tax consequences, and the receiving spouse's TFSA room is not reduced by the incoming transfer.

Locked-In Retirement Accounts (LIRAs) — often created when someone leaves an employer with a pension — follow similar rules to RRSPs for division purposes but have withdrawal restrictions. A Form T2220 transfer from an RRSP can go into a LIRA, but the funds then become locked-in.

Common Mistakes

Cashing out instead of transferring. Even if both spouses agree, don't withdraw and re-deposit. The tax consequences are immediate and irreversible.

Forgetting the separation agreement requirement. Form T2220 requires a written agreement or court order. An informal email agreement between spouses won't satisfy the financial institution or CRA.

Ignoring the fee schedule. Some financial institutions charge transfer-out fees ($50-$150). Factor this into your agreement — who pays the fee?

The PEI Divorce Financial Split Guide includes the RRSP division steps alongside the equalization worksheet, so you can calculate exactly how much needs to transfer and track the Form T2220 process from agreement to completion.

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