Few people come out of a divorce financially better off. After all, divorce involves dividing family assets — and whether you have a lot or a little, divorce is draining and messy.
The pandemic has no doubt affected relationships at home, exacerbating pre-existing problems. It’s easy to see how stress, uncertainty, being confined to your home and financial problems can tip a marriage over the edge.
Divorce comes with complications with lots to think about and settle. The costs associated with the divorce itself will vary depending on how well or poorly the parties work together. The longer the proceedings take, the higher the cost.
Difficult questions will arise, including those about property division and custody of children. You’ll also find yourself suddenly solely back in charge of your own finances, which may have dramatically changed since you got married.
The laws around divorce are complicated. The federal law, the Divorce Act, sets out conditions for getting a divorce and addresses issues around child support, spousal support and parenting arrangements. Provincial and territorial laws apply to some of these issues, such as the division of marital property. It is important to know that family laws vary significantly from one jurisdiction to another.
Rework the basics
What you own and what you owe. In most cases, upon separation, it will be necessary to list your assets, including bank and investment accounts (registered retirement savings plans, registered education savings plans, non-registered accounts, etc.). You will probably close your joint accounts and, if necessary, open new accounts. Don’t forget about credit cards, supplementary cards on the other’s account and any automatic transfers that would be made to your ex.
Debt payments. Are you worried about your ex’s debt? If the debt is in their name alone, you don’t need to worry. However, if both your names are on the debt (e.g., a loan, line of credit), you’re both responsible for the debt.
Many couples may agree to a repayment arrangement. However, in the eyes of creditors, you are both responsible for the debt, whether or not there is a repayment agreement between you.
If your ex defaults on the debt, you are responsible for repaying their share of the debt. The same applies in the case of a bankruptcy — your ex’s creditors can go after you for any joint debts. It is important to take all possibilities into consideration in your planning if your ex doesn’t have the financial means to pay their debt. Think about protecting yourself with a formal agreement.
Income and expenses. Take stock of your income and reorganize your budget. If your divorce settlement requires you to pay spousal support, your income will be reduced. You may also have to pay various expenses you previously shared. Keep a record of payments. Although child support payments are not deductible by the payer, spousal support payments are, when they are made on a regular basis.
Government benefits and any pension plans. Remember to inform government authorities of your new marital status in order to receive any benefits you may be entitled to. The Canada Pension Plan and Quebec Pension Plan contributions you have both made can be equally divided, through a process called credit splitting. Other pension assets will be part of the calculations to divide your assets equally.
Your medical professional corporation
If you are incorporated, your business may be affected by your divorce. Chances are, you’ll have to value the shares of your medical professional corporation, factoring in the assets, liabilities and goodwill of the practice. The value may be used to determine equalization of assets or spousal and child support amounts.
Your ex-spouse is likely more interested in the value for equalization payments, not the actual private company shares.
What if you’re both physician shareholders in one medical professional corporation? You may have a shareholder agreement that sets out next steps, so start there. Aspects that may need to be addressed include who would retain ownership, whether the corporation would be renamed and whether the exiting physician would create a new medical professional corporation.
Re-evaluate your insurance needs
During your relationship, you probably assessed your insurance needs based on both of your incomes. For example, you may have known you could rely on your spouse’s income in case you were suddenly unable to work, and so you didn’t have disability insurance. Or you may have purchased a life insurance policy for the benefit of your former spouse.
It’s therefore important to evaluate your new situation, assess your needs and make the necessary changes to your life and disability insurance. This will be the time to review all your insurance policies and designate new beneficiaries, if necessary.
Revise your will and power of attorney
You will need to review your estate plan fairly quickly, especially your beneficiaries.
Executor and power of attorney. If the executor of your will or the person appointed to be your attorney for property and for personal care was your spouse, you may wish to appoint another person in their place.1
The executor and the named attorneys under power of attorney documents don’t have to be the same person. However, make sure they are trustworthy. They will be responsible for carrying out your last wishes — or perhaps managing your financial affairs on your behalf or deciding what care you will or will not receive.
Your estate plan. It will also be a time to review your estate plan to ensure that upon your death, your assets will be distributed according to your wishes and that your estate will pay as little tax as possible.
The tax impact of divorce
The tax consequences of a separation or divorce are not always immediately apparent. Tax law is complex and rich in subtleties.
Division of property. When dividing property, it’s important to determine who will keep what and to make the right tax choices. Let’s take the example of Dr. Amari Campbell and her husband, Joseph, who separate. They agree to let Joseph keep the family home and transfer his RRSP to Amari as compensation.
This transfer, commonly known as a spousal rollover, has no immediate tax impact, which may seem interesting at first glance. But Amari will have to pay tax when she withdraws the funds from the RRSP, while Joseph will not have to pay tax on the capital gain when he sells the house if he has designated it as his principal residence.
Child support. Child support payments to cover children’s needs are not deductible from the payer’s income and are not added to the recipient’s income.
These are only some of the issues to be considered as you update your investment, estate and insurance strategies. It is wise to work with a team of professionals who can help you make the most of a difficult situation.
Time to reassess your goals
A divorce will affect all parts of your life. You’ll need to reassess both your financial and personal goals.
Financial goals. On the financial side, you will have to balance your budget according to your new income. You may find that your financial goals are no longer within your reach and that changes are needed. But you may also have less debt because you sold off the common assets and opted for a more frugal lifestyle.
Personal goals. Once the storm has passed, it will be important to take time to refocus on your personal goals. Your retirement plan probably no longer makes sense. Will it be necessary to put a cross on the boat, the wine cellar or the condo at Whistler? Maybe not — but you’ll need a new plan that accounts for what your sources of income will be when you retire.
Your MD Advisor* can help you create a new financial plan to get back on your feet and keep moving forward.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
Estate and trust services are offered through MD Private Trust Company.
1 An “executor” is called a “liquidator” in the province of Quebec and an “estate trustee” in the province of Ontario. In the province of Quebec, a “power of attorney” is called a “procuration” or a “mandate.”
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.