Securing Your Financial Future

From dividing property to staying ahead in the tax game, here's what you need to know when your marriage has broken down.

By Gail Vaz-Oxlade
Updated: September 19, 2014
Divorce Financial Planning/Investment

When a marriage disintegrates, ultimately the question becomes "who gets what?" The division of property is governed by provincial law and therefore varies from one province to another. This is one reason why anyone seeking divorce must rely heavily on the specialized legal advice of a family lawyer when it comes to making a financial claim.

While the rules vary from province to province, the goal remains the same regardless of where you live. That goal: to divide the value of the assets accumulated throughout the marriage between the individuals.

Traditionally, women have been on the receiving end of marriage settlements. Having often supported spouses through their education and subsequent ladder climbing, having stayed home to mind the babies, women who see their marriages end are often compensated financially, as if money can make the hurt go away. But with the new independent woman earning and managing her own money, we're seeing the tables turned.

The definition of property -- the stuff to be split between the exes -- varies provincially. While some provinces draw a distinction between non-family and family assets, others do not. Family assets are usually made up of the stuff used by the family: the car, the house, the joint accounts. Non-family assets tend to be the things that the family didn't have much to do with: perhaps a business or an inheritance.

When it comes time to divide the property, it is the net value of the property (the value of the property less any debts against it) that is used in the calculations. So if you own a house worth $300,000 and you have a mortgage for $120,000, the net value of the house is $180,000. It is this net value to which you are entitled a portion.

In Ontario, the Family Law Act governs how couples deal with property upon separation and divorce. When spouses in Ontario separate, there is no division of property. What's his is his, what's hers is hers. However, there is a calculation made to determine how much money the person whose net asset value has increased most during the marriage should pay to the other, so that they each end up with assets of equal value. This payment is called an equalization payment.

In essence, everything you owe and own are valued for the date you got married and the date you separated. You then subtract the net value of the things you brought into the marriage from the net value of the things you owned at separation date (unless you got them during marriage as a gift or inheritance) and you'll end up with your Net Family Property (NFP). Then figure out your spouse's NFP, deduct the lower NFP from the higher one and divide the difference in half. That's the amount of the equalization payment made by the richer to the poorer party, so you both end up with the same amount -- sometimes.

As with any rule, there are always exceptions, so you might, in fact, not end up dead even. If, for example, you received a gift or inheritance during your marriage, it'll be excluded from the NFP calculation, provided the money was not included in the matrimonial home. If it was used to buy the matrimonial home, pay down the mortgage, renovate -- anything to do with the matrimonial home -- the inheritance or gift will have lost its protective shield. There are other exclusions and special rules setting out when you can or cannot deduct the value of the matrimonial home in your name, so a lawyer well-versed in family law is a must.

The stuff that isn't divided is referred to as exempt property and, again, the list varies provincially. Typically the list includes:

  • assets owned before the marriage
  • assets exempted under a marriage contract
  • assets accumulated after the date of separation
  • gifts or inheritances received during a marriage, and family heirlooms
  • items of exclusive personal value
  • business assets
  • gifts from one spouse to another
  • proceeds from a life-insurance policy
  • personal injury settlements or court awards
  • traceable property.

This last one can be a little complicated and speaks to the need to keep meticulous financial records all through a marriage. If the property started out as exempt property but ended up in another form, the property remains exempt even in its new form. So let's say your mother left you $40,000 which you put into a GIC; while the GIC wouldn't normally be exempt, because it came from an inheritance, that property will be exempted as long as you can show the paper trail.

Of course, the next question that arises is, "How is the value of the property determined?" This can be a very complicated issue, particularly in provinces that don't specify the value to be used. Naturally, wildly different numbers can be created if the value is based on current market value or book value (the value of the property when it was acquired). Add in the twists of whether or not tax and other financial obligations should be calculated, and what you have is a very windy road.

Valuing Pension Assets

When the asset being valued is a pension, valuation can become particularly tricky. If your province considers the pension to be a family asset, it must be valued and divided like other family assets. This can be a phenomenally complicated, and often expensive, task. Since the amount to be divided must only be the amount accumulated during the marriage, the entire pension will very likely not be split. Valuators and accountants must then be brought in to consider the method of calculation, mortality tables, early retirement provisions, death benefits, and tax consequences.

Just because evaluating a company pension plan can be an icky and expensive job, don't just let the whole pension thing slip away unnoticed. Chances are that pension is worth more than you think. Many people believe it to be worth only the value of the contributions made. Not so. Don't ignore this potentially very important asset.

You may also be entitled to divide Canada Pension Plan (CPP) credits equally with your ex, whether you were married formally or had a common-law relationship. And the fact that you're in a new relationship doesn't affect your ability to request a credit split for the period you lived with a former spouse.

If you were legally married and lived together for at least 12 consecutive months, and your marriage has ended in divorce or legal annulment, there's no time limit to initiate credit splitting. If you are still at the separation stage, before you can split CPP credits, you must be separated for at least 12 consecutive months. Either you or your spouse can apply to Human Resources Development Canada (HRDC) to initiate credit splitting. There's no time limit, except if your ex dies, in which case the application must be made within three years of his/her death. If you've been in a common-law relationship, the rules are the same as for married couples who have separated, except that you must make your claim within four years of separation.

Here's how CPP credit splitting works. The credits both spouses accumulated while they lived together are added up, and the total number of credits is divided equally between them.

These credits are not actually paid. They are used to determine the amount of any CPP benefits to which you may be entitled.

To apply for credit splitting, you must provide originals or certified copies of your marriage certificate, proof of divorce or legal annulment court documents, and any separation agreements and/or Minutes of Settlement between you and your former spouse. In the case of a common-law relationship, you'll be asked to make a Statutory Declaration to establish the length of a common-law relationship. This declaration may be taken at an HRDC office at no cost to you.

You should be aware of a recent court ruling if you enter into a discussion about splitting pension assets. In the past, a spouse whose pension assets were being divided, and who subsequently declared bankruptcy, could see the payments to the receiving spouse decreased or even stopped by the bankruptcy. However, an April 14, 2000, ruling in Ontario's Superior Court of Justice in Ottawa made it clear that, if the judge ordering the pension equalization payments "impresses them with a trust," the debt will survive the bankruptcy process. The "impresses them with a trust" lingo is simply judicial speak for segregating the funds so they are not subject to other claims. The bottom line: if you're splitting pension assets with your STBE (soon-to-be-ex), make sure the judge rules that the funds are impressed with a trust (or, if you don't go to court, your separation agreement is worded accordingly) so if the worst does happen, you won't be left out in the cold.

Negotiating a Settlement

Often women choose to keep the family home, giving up retirement assets in exchange. But this isn't always a smart move. Women who have stayed out of the work force to raise a family, or who have lower paying jobs, need to hold on to at least a portion of the family's retirement assets. With no RRSP room to catch up, you'll be starting from ground zero if you relinquish RRSP assets totally. This is particularly important if you're in your late forties or fifties and have less time to rebuild a strong retirement asset base.

A fifty-fifty split of RRSP assets may seem fair, but if your spouse also has a company pension plan, that has to be taken into consideration. If you won't be entering the work force immediately, you'll need to negotiate extra income for investment purposes so you don't spend several years contributing zilch to your retirement plan. Also keep in mind that if your spouse has significant unused RRSP contribution room -- if he could have made contributions but chose not to -- those catch-up contributions aren't divisible after the settlement. Negotiate for a portion of those contributions to be made in your name (as a spousal contribution) prior to the division of assets, and that the spousal RRSP will not be equalized. That way you'll have assets that can continue to grow on a tax deferred basis.

Once you are living separately, the RRSP rules for withdrawals from a spousal plan change. The money will be taxed in your hands, so don't go grabbing money out of your spousal plan thinking your old buddy will get stuck with the tax bill. You'll end up paying the piper.

Most people don't even know what contingent liabilities are, let alone take them into account when figuring out how to split their assets. A contingent liability is a liability that has yet to rear its ugly head. It's something that you may owe in the future, like taxes, fees, or other expenses. A perfect example of this is a case where registered and non-registered assets are being equalized separately -- let's say one person is taking the RRSP and the other is taking the house. There has to be some recognition that the party holding the RRSP will be taxed when those funds are withdrawn, so the RRSP holder negotiates that those assets be discounted for the tax that will be paid on them. The same kind of negotiation would protect the spouse who took the house as settlement if that house had to be sold a short while down the road. Factoring in the reduction in the asset for legal fees, real estate commission, GST, and incidental expenses evens the playing field in terms of income after taxes and expenses.

Worried about the tax you might have to pay because an asset you're assuming has a contingent tax liability? You can choose not to have income attribution rules for capital gains apply to you by formally filing an election at the next tax filing after the split of assets. For example, Jane takes over an asset such as a painting that is subject to capital gains tax, and the painting goes up in value. If it's sold within the next year, the tax man would want to tax only her ex-husband, John. By filing the election, the asset would be taxed in Jane's hands, where the tax owed would be lower.

The Matrimonial Home

The one asset that doesn't get lumped in under the categories we've looked at so far is the matrimonial home. The matrimonial home is any residence in which either party has a legal interest (so that applies to the home you own or rent) which is ordinarily occupied by the spouses as their family residence at separation or immediately before separation. If you have a city house that you ordinarily occupy, that's a matrimonial home. You don't need a document saying that. If you have a cottage that you ordinarily occupy a few weeks each year, that's a matrimonial home. You can have as many matrimonial homes as you live in. Investment properties don't count. You have to live in it together at some point in the year.

All provinces are in agreement that one spouse should not be able to do anything to dispose of or encumber the property without the consent of the other spouse. So, your spouse should not be able to put a mortgage on the property without you knowing. Nor should he/she be able to sell your home out from under you. I say "shouldn't" because there are always stories that belie the shoulds of life.

While ownership is one question, possession is yet another. In some provinces -- most, in fact -- regardless of who actually owns the home, both parties are entitled to possession. So either you or your ex can apply to the court to give you sole possession of the matrimonial home regardless of whose name appears on the deed. This exclusive possession can be a valuable right, particularly in cases where there is family violence.

If a matrimonial home at the date of separation was the same home lived in at the date of marriage -- he owned the house, she moved in when they got married, or she owned a house, sold it, and used the proceeds to buy a new home into which they both moved when they married -- then the original home-owner cannot deduct its value prior to the marriage when calculating the NFP. Ouch!

You are going to have to consider the likelihood that your family home may have to be sold to equalize. If this appears to be the case, you'll need to begin looking for an alternative home for you and your kids. It also means "guestimating" how long it will take to sell the home so you have an idea of when you'll need to take possession of the new property, whether you're buying or renting. Check the real estate market in your neighborhood to see how fast properties are turning, and how close to the value you're likely to get.

It costs a pretty penny to pack up a household and move. Before you negotiate the final settlement, make sure you've included estimates from moving companies so that your settlement covers it. And don't forget to find out how any insurance or tax rebates will be divided.

Determined to keep the house? Many people are. They cite continuity for their children -- same schools, same neighbors, same friends. They cite the inability to cope with one more change with everything else going on. They cite the fact that they love the house. Whatever your reason may be, if you want to keep your existing home, you'll have to look into ways to finance the equalization, in essence to buy out the other's share. A new mortgage, a line of credit, and a second mortgage are all options. Keep in mind that the more debt you take on, the harder it's going to be on your cash flow once you find yourself on your own. But if it means that much to you, you'll find a way. If you don't have credit or the financial means yourself, parents and relatives may be willing to help.

If you're planning to buy another home, make sure your credit history is nice and shiny, and shop around to see how much you'll qualify for on your own. In addition to the down payment, you'll need enough money to pay legal fees, insurance, property taxes, and various closing costs. So you need to know what price home you can realistically afford before you go shopping. A pre-approved mortgage can help you determine that.

Resist the urge to fight over the stuff in the house. Disputes over furniture and personal property can be expensive. Think about how to fairly evaluate and divide personal property. If you get carried away with the sentimental value of your stuff -- letting emotion rule where reason should -- you could end up paying your lawyers a lot more money to fight over that rug, dining room furniture, and entertainment system than it would cost to replace them.

Arming Yourself with the Financial Facts

Whether you're leaving the relationship or you're the one that has been left, at some point you have to gather all the information to arm your lawyer with enough to get you your fair share of the family assets. One of the most important documents you'll be asked to complete is the financial statement. This is the document that will be used to determine how property will be divided and support awarded, so a lot rides on its accurate completion. Trying to avoid listing assets doesn't work, as the lawyers for both sides will compare both spouses' statements. If there was ever a time you did not want your credibility to come into question, this is it. So be honest. If you end up in court, you and your financial statements will be cross-examined vigorously.

One section of the financial statement includes a budget with 69 different types of expenditures, to help figure out the family's spending pattern and what that spending pattern will likely be in the future. If you don't know what you're paying for taxes, entertainment, vacations, food, rent, or medical expenses, you won't be able to paint a clear and complete enough picture for the judge. Include everything. Just because you have a drug plan doesn't mean you don't need a drug budget. Think of all the things that aren't covered by the plan: headache, cold and allergy medicine, antibiotic cream and Band-Aids, potions for diarrhea, stomach upset, and nausea. Anything purchased without a prescription is not covered, so everyone needs a drug budget.

Leavees have one-up on this because they can begin gathering info before their partners are aware they should be hiding stuff. Leavers often have to scrounge around, dig deeper, and resort to deceit and skullduggery to gather information. It doesn't really matter what you have to do to get the information… just do it!

Typically, women who are being left are far less aware of their family's financial picture than are the men in their lives. And while many a marriage has lots of loot buried deep in the family files, most women who have not been involved in the financial side of things have no idea of where to begin looking.

A false assumption often made is that the legal system is fair and that it will all come out in the wash. This is simply not true. There are hundreds of stories of people who have been awarded far less than was fair because they didn't do their homework.

Staying Ahead in the Tax Game

If you plan on receiving support -- whether for yourself or your children -- then your financial planning for divorce must begin even before you negotiate your separation agreement. That's because there are special rules for how spousal and child support are taxed.

Spousal support is deductible for the payer, and is included in the income of the payee, as long as the recipient is receiving support as directed by a written separation agreement or court order, and those payments are made on a periodic basis. This only applies to people who have been legally married. If you've just cohabited, you'll need a court order to have your paid support deemed deductible by the taxman. Revenue Canada recognizes payments made on a periodic basis one calendar year prior to the year your separation agreement is signed: if you sign a separation agreement in 2001, you can go back as far as January 1, 2000, to claim periodic payments made.

In the year of separation you have a choice between claiming payments made or the spousal credit. If you legally separated in December, it might be worth more to claim the spousal credit than a single month's support payment. Do the math before you make the choice. Also note that the same flexibility applies if you and your spouse decide to make another go of it, and is applicable for the year the reconciliation takes place.

As of May 1, 1997, child support is not included in income of recipient. Nor is it deductible for the payer. For support orders made prior to 1997, payments are deductible by the payer and included in the income of payee.

As a single parent, you can claim the equivalent-to-married credit for one of your children. You can also claim all your child-care costs -- everything from occasional baby sitting to a nanny -- as long as you get a receipt. You don't have to submit those receipts with your return, but you must keep them just in case Revenue Canada asks for verification.

If you have children in university, make sure they file their own returns. Children who do not need to claim all their tuition fees to reduce their federal tax payable to zero can transfer those fees to you.

Investing in Yourself and Your Kids

Now that you're completely dependent on yourself, if you're not taking care of your future, no one is. If you have earned income, you should be contributing to an RRSP. Get on a periodic investment plan. You can start with as little as $25 a month. If you think you can't afford to be investing for your future because your present costs so much, ask yourself this question: If I don't save for my future, what will I live on when my future becomes my present? If you think you have plenty of time to catch up, ask yourself what you did with the last five years of your life and how much you would have today if you had started back then. If you think the government is going to take care of your future, here's a gentle reminder: you thought your spouse was going to do that too. You can't depend on anyone but yourself.

Make sure when you negotiate your settlement that you include a provision for the future education of your children. Your separation agreement should specifically state who is responsible for post-secondary education. While the my-ex-will-take-over-after-high-school condition may seem fine, what will you do if he/she just doesn't have the resources? Or suppose your ex dies before all your kids have made it through university? Better to establish a systematic savings plan for each child -- be it a Registered Educational Savings Plan (RESP) or in-trust account -- so that you can be sure the money will be there when it comes time for your kids to head off to the halls of higher learning.

By arming yourself with the financial facts about your marriage and divorce, you're better equipped to assist your lawyer to negotiate a settlement that will help to secure your -- and your children's -- future. And start investing in that future today; a financial advisor can help you choose an investment strategy tailored to suit your unique needs and circumstances.

This article has been edited and excerpted from Divorce: A Canadian Woman's Guide by Gail Vaz-Oxlade. A financial expert and columnist for the Globe & Mail and Chatelaine, Vaz-Oxlade interweaves a practical guide to all aspects of divorce with inspiring and cautionary tales of women who have been through the process. There are chapters on the legal and emotional divorce; financial issues; children and single parenting; building a "divorce team"; and what to expect before, during, and after divorce. Twice divorced, three times married, a mother and a stepmother, Vaz-Oxlade brings a lot of first-hand experience to this book.

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August 16, 2006
Categories:  Financial Issues

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