No one wants to think about divorce, but with one in three marriages ending that way, it’s important to consider the consequences of an irrevocable break-up. While the end of a marriage is certainly devastating from an emotional perspective, it can also be detrimental from a financial one. Joint accounts can get split, financial plans become torn up and assets have to get separated. So, what should you do?
The first place to start, especially if you’re not the one controlling the family finances, is get help figuring out where money is being held, says Christine Van Cauwenberghe, Investors Group’s Vice-President of Tax and Estate Planning.
Frequently, one spouse is less aware of financial situations and arrangements and they need to have an accurate picture of their economic situation.
“Frequently, one spouse is less aware of financial situations and arrangements and needs to have an accurate picture of their economic situation,” she says. “Without wise counsel during this critical time, the results can be devastating for one or both former marriage partners.”
Here are some of the critical financial and other implications that must be considered when a marriage ends.
Immediate financial issues
Close your joint accounts and open an individual account, says Van Cauwenberghe. Also cancel joint credit cards and any automatic payments being made on behalf of the ex-spouse, including spousal RSP contributions.
Your legal right to finances
Generally speaking, when a couple separates, the parties are entitled to a division of assets. The calculation regarding what is or isn’t included varies between the provinces. In some provinces, even assets acquired before the marriage are shareable, and in other provinces assets acquired even after the date of separation, but before the date of divorce, are included. Both parties should receive legal advice before agreeing to anything, says Van Cauwenberghe.
The rules regarding a division of assets upon the dissolution of a common law relationship vary dramatically across the country. In some provinces, partners are entitled to the same division of assets as a married couple once they have lived together for a sufficient period of time. In other provinces, former partners are not entitled to a division of assets no matter how long they have lived together, she explains.
Assets to consider
When it comes to assets from the marriage, there are a number of things to consider dividing, says Van Cauwenberghe, including the family home, a share of government or workplace pensions that your spouse contributed to during the marriage, funds accumulated in an RRSP and other properties or investments.
Both men and women can apply for spousal support. The courts are more likely to order permanent support for spouses who had been homemakers during the marriage. Generally, spousal support is deductible to the payor and taxable in the hands of the payee. Child support, though, is not taxable to the parent who receives it and is not deductible for the person who pays it.
Even for separating couples with modest assets, there are many tax issues that should be considered. Cottages, RRSPs and other investments may be split up – but they could be taxed in the process.
“Individuals should speak to an accountant when they get separated to understand the tax consequences of transferring assets,” says Van Cauwenberghe. “They need to understand that a $200,000 RRSP does not have the same after-tax value as $200,000 equity in a home. There may also be a number of tax credits and deductions that they may be entitled to, but only if the agreement is properly structured. Getting advice early in the process is important to ensure no opportunities for tax savings are missed.”
You should also rewrite your will, otherwise your separated spouse may be entitled to your estate if they are named in the will. Once you become legally divorced, the ex-spouse may be treated as having predeceased you so, even if they are named in your will, they will not inherit anything.
A divorce is hard on the emotions – make sure it isn’t hard on your finances, too. Get the help you need to make sure you get your fair share.