Use of RRSP to Satisfy Child Support Obligations

Canada Revenue Agency (“CRA”) publishes its views regarding the interpretation of legislation, from time to time. This is contained in documents typically described as “CRA Views”. 

 

In a recent Views document, CRA outlined its position regarding the use of an RRSP to satisfy an existing child support obligation. 

 

In general terms, taxpayers can take money out of their RRSPs for any purpose at any time. Any withdrawals are, however, generally subject to payment of tax in connection with the amount withdrawn. In addition, at the time of any such withdrawals there is typically a withholding of taxes of up to 30%, depending upon the amounts withdrawn.

 

There are, however, exceptions to this rule. The Income Tax Act (the “Act”) allows certain transfers between spouses to take place on a tax rollover basis such that when one spouse transfers amounts to another spouse in those circumstances, there will be no tax to be paid in connection with the transfer.

 

One of those exceptions relates to amounts paid by an annuitant from their RRSP to their former spouse’s RRSP. This is generally allowed to take place on a tax deferred basis where the amount transferred is pursuant to a Decree, Order or Judgment of a competent tribunal or under a written Separation Agreement. 

 

In this particular situation under review, the amount that was being transferred from one spouse’s RRSP to their former spouse’s RRSP was in relation to the settlement of a child support claim.

 

CRA’s position is that in order to transfer funds from one spouse’s RRSP to a former spouse’s RRSP on a tax deferred basis, the transfer of the amount must relate to a division of property in settlement of rights arising out of, or on the breakdown of, their marriage or common-law partnership. CRA’s clear view is that any payments related to child support and spousal support are separate and distinct from payments related to division of property.

 

Although disappointing, it is fair to say that this interpretation of the applicable legislation makes sense and is consistent with the existing case law.

 

If you have any questions about this matter or any other tax matter please contact Keith Trussler, Linda Smits or Ainsley Furlonger.