Why RRSPs and Investments Are Adjusted for Tax in Your Net Family Property- Part 1

When you’re going through a separation, one of the most confusing parts of preparing a Net Family Property (NFP) statement is seeing your RRSP or investments listed at an “after‑tax” value. This isn’t a penalty but it’s simply a recognition that some assets will trigger income tax in the future, and family law aims to reflect that reality when dividing property.

RRSPs are fully taxable when withdrawn, and capital gains on investments are partially taxable when sold. Because these taxes will eventually be paid, professionals must estimate what that future tax might look like. Two methods are commonly used: the marginal tax rate and the average tax rate. Understanding the difference helps you make sense of how your assets are valued today.

Marginal Tax Rate

Your marginal tax rate is the rate you pay on the next dollar of income. It represents your highest tax bracket.

• If your marginal rate is 30%, every additional dollar earned is taxed at 30%.

• Some professionals use this rate because it’s simple and reflects the maximum possible tax on RRSP withdrawals.

But this method assumes you withdraw a large amount all at once and that every dollar is taxed at the highest bracket. Rarely, that matches how people actually use their RRSPs.

Average Tax Rate

Your average tax rate is your total tax paid divided by your total income. Because income is taxed in layers, your average rate is always lower than your marginal rate.

For many retirees, average rates fall closer to 15–30% because:

• Withdrawals are spread out over time

• Retirement income is usually modest

• Tax credits reduce the effective tax paid

• Income sources like CPP, OAS, and pensions keep people out of the top brackets

Why This Matters

Using a higher marginal rate reduces the after‑tax value of your RRSP. Using a lower average rate increases it. Neither method is “right” or “wrong”—the goal is fairness and reasonableness.

Part 2 explains how professionals choose the right rate for your situation and how this affects your final NFP.