When dividing RRIFs and LIFs during an Ontario divorce, you can transfer these retirement funds to your ex-spouse tax-free. You must use CRA Form T2220 along with a signed separation agreement or court order to avoid triggering massive income tax penalties.
Grey divorces-separations occurring later in life-are increasingly common across Canada. When couples in Ontario separate in their 60s or 70s, dividing property often involves Registered Retirement Income Funds (RRIFs) and Life Income Funds (LIFs) that are already in their mandatory payout phase. 👳
Whether you reside in Mississauga, Hamilton, or London, treating a RRIF or LIF like a standard bank account can lead to disastrous tax consequences. Because these funds are pre-tax retirement savings, cashing them out to pay a property equalization claim will result in a hefty tax bill from the Canada Revenue Agency (CRA). Thankfully, Ontario family law and federal tax rules provide a pathway to divide these assets safely.
Step-by-Step Process to Divide RRIFs and LIFs in Ontario
To properly divide retirement income streams, you must follow strict financial and legal procedures. A local family lawyer can help you coordinate with your financial advisor to execute these steps smoothly.
Step 1: Determine the Date of Separation Value
Unlike RRSPs which hold a straight value, RRIFs and LIFs are actively paying out income. You must determine the exact value of the account on your Date of Separation. If a payout was made to the account holder after the separation date, you may need an actuary to help adjust the Net Family Property calculations. 📈
Step 2: Finalize a Formal Separation Agreement
Financial institutions in Ontario will not split a RRIF or LIF based on a verbal promise. You need a legally binding separation agreement or an order from the Superior Court of Justice. The document must explicitly state the exact amount or percentage of the RRIF/LIF to be transferred to the recipient spouse.
Step 3: Complete CRA Form T2220
The most crucial step is completing Canada Revenue Agency Form T2220 (Transfer from an RRSP, RRIF, PRPP, or SPP to Another RRSP, RRIF, PRPP, or SPP on Breakdown of Marriage or Common-law Partnership). Both spouses sign this form and submit it directly to the bank or financial institution holding the funds, NOT to the CRA. This form legally protects both parties from paying immediate income tax on the transferred amount.
How Much Does it Cost in Ontario?
Dividing retirement assets during equalization generally involves professional fees rather than government fees. Here are the expected costs:
- Financial Institution Fees: Most banks charge a nominal transfer fee of $50 to $150 CAD to execute the rollover.
- Actuary / Valuation Fees: If you need a professional to calculate the exact after-tax value of a complex LIF, expect to pay $500 to $2,000 CAD.
- Lawyer Fees: Having a law firm draft a standard property division agreement typically costs between $2,500 and $5,000 CAD depending on complexity.
How Long Does the Process Take?
Gathering the financial disclosure and negotiating the separation agreement usually takes 3 to 6 months in Ontario. Once the agreement is signed and Form T2220 is submitted to the bank, the actual rollover of the RRIF or LIF funds usually takes 2 to 4 weeks to process.
| Feature | RRIF (Registered Retirement Income Fund) | LIF (Life Income Fund) |
|---|---|---|
| Source of Funds | Usually converted from a standard RRSP. | Converted from a locked-in pension plan (LIRA). |
| Withdrawal Limits | Has a minimum annual withdrawal, but no maximum limit. | Has both a minimum and a strict maximum annual withdrawal limit. |
| Division Method | Easily transferred to an ex-spouse’s RRSP or RRIF via T2220. | Subject to provincial Pension Benefits Act rules; must be transferred to a locked-in vehicle. |
Frequently Asked Questions (FAQ)
Do I pay tax when I receive half of my ex-spouse’s RRIF?
No, provided you use the proper CRA forms to execute a direct rollover. You will only pay income tax later when you eventually withdraw the funds for your own living expenses.
Can a LIF be cashed out entirely after a divorce?
Generally, no. Because a LIF originates from a locked-in pension, the funds transferred to the recipient spouse must usually go into another locked-in retirement account, governed by Ontario’s strict pension rules.
Do common-law partners have the same rights to RRIFs?
In Ontario, common-law partners do not have an automatic statutory right to property equalization. However, if a division is negotiated or ordered through a constructive trust claim, the same tax-free transfer rules via Form T2220 apply.
Can I draft the T2220 form without a lawyer?
While you can fill out the form yourself, the financial institution will reject it if it is not accompanied by a formal, valid separation agreement or court order.
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