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A Checklist of Asset Values and Documents Required for Equalization

This is a checklist prepared to help you know what values will be needed in the calculations to divide your property and liabilities with your spouse. It is not intended to be a complete list, and is intended to serve as a guide in helping you prepare for meetings with advisors.  I also mention typical documents you will need to collect as evidence of your values – you should expect to be asked for copies of these documents by your financial advisor, your lawyer and/or your partner’s legal counsel.  Remember that these values are all based on the date of separation (or in rare situations, at another date, as would be advised by your lawyer.)  For more explanations of how to value your assets, see my other articles, and in particular, my article titled, “Financial Information for Calculating Net Family Property” and Property Values for Equalization ExplainedWhere can you get help with valuations? See my topic titled Finding Asset Values on my Useful Links page here. The amounts needed will be “re-sale” values at the date of your separation, as well as at the date of your marriage.  For certain items with income tax costs if and when sold, your cost for tax purposes will be needed.  Assistance from appraisers or valuators will likely be needed to establish certain values, but get some guidance first from your financial divorce professional.  For certain properties and debts, additional information, such as beneficiary details, will be required.  Your lawyer, of course, will provide you legal advice and guide you through the divorce process.  A family counsellor can assist you with emotional support and direction in reorganizing your family matters, such as developing a parenting plan for children.  Review my web site or contact your provincial public legal information association (in PEI, the Community Legal Information Association of PEI (www.legalinfopei.ca)) for more information.


Property (and typical documents needed)

Family home (appraisal documents unless intent to sell)
Cottage (as above)
Land holdings (as above)
Rental properties or other real estate owned (as above)
Household furniture (for major items, appraisal resale or online list prices of similar used furniture and appliances, unless both parties can agree on values or equal sharing)
Personal jewelry (as above)
Collectibles and antiques (as above)
Automobiles (See my Useful Links for valuation sources)
Recreational vehicles, motorcycles, snowmobiles, boats, etc. (as above)
Bank balances (account statements showing balance at date of separation)
Tax Free Savings Accounts (as above)
Registered Retirement Savings Plans / Registered Retirement Income Funds (as above)
Locked in Retirement Accounts (LIRA) (created by transfers from an employer pension plan)(documentation as above, but an actuarial valuation may be required if part of the LIRA is related to pre-marriage service)
Registered Education Savings Plans (as above)
Term deposits and savings certificates (including interest earned to date of separation) (as above)
Stock market and investment brokerage account balances (as above)
Employer pension plan details (Most recent statement and employer booklet, if any; employer pension valuation and independent actuary pension valuation – see my article titled “Pension Values for Separation and Divorce“); this includes any supplemental pension plans, Retirement Compensation Arrangements RCAs) or Individual Pension Plans (IPP) often available to high income employees.  If there were any pension buyback purchases made, details should be provided of time purchased and related dates.
Employment benefits such as share purchase plans, Restricted or Performance Stock Units (RSUs/PSUs), stock option plans often provided by large and/or publicly traded companies
Information on monthly annuities or pension entitlements to be or already being received (most recent statements)
Life insurance – policy descriptions, beneficiaries, cash surrender values, premiums etc. (list all details or most recent policy statements)
Savings plans through employment, such as employee savings or profit sharing plans (statements at date of separation)
Entitlements to future retiring allowances from work (e.g. 1 week of pay for each work year) (letter from employer or other documents providing details)
Vacation pay owed at date of separation (as above)
Other balances owed from work when you retire (sick leave, over-time, etc.) (as above)
Details of group insurance plans through work, including health, life and disability insurance (most recent statements and/or employer policy booklet)
Private loans owing from family members or other parties (copy of loan agreement and cancelled cheques, bank drafts, etc. to show payment)
Details of private business ownership (financial statements and any business valuations recently prepared)
Details of farm or fishing businesses and related assets (as above)
Amounts of significant loyalty point programs (e.g. Air Miles, Aeroplan, etc.) (statements if significant) in value)
Values / details of any other property
Debts and Liabilities
Mortgage or home line of credit balances (statements at date of separation showing balances and loan documents showing loan rates and terms)
Credit card balances (statements at date of separation)
Amounts owing to creditors for unpaid bills (copies of bills, and any documents showing date of payment and by whom)
Personal lines of credit (statements at date of separation showing balances and loan documents showing loan rates and terms)
Car loans (statements at date of separation showing balances and loan documents showing loan rates and terms)
Private loans owing to family members or other parties (copy of loan agreement and cancelled cheques, bank drafts, etc. to show payment)
Details of guarantees pledged or loans co-signed by you for other parties (copy of loan agreement and statement of balance owing at date of separation)
Amount / details of any other debts owed  (statements showing balances)
Details of all of the above property and liabilities as at the date of marriage (Documents needed will be similar to above, but at date of marriage)
Details of amounts received during marriage from inheritances or gifts, damages for injuries and other health issues, and amounts collected from life, accident or sickness insurance policies (Documents needed will be similar to above, but at date of receipt)
Details of any marriage contracts
Other information you believe may be relevant

You should also make a list of any significant property disposals during the last two years to provide to your lawyer.



Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Common Mistakes in Separation Negotiations

In this article, I offer you my thoughts on common mistakes made by people going through separation and divorce. They are based on only my observations and my opinions, not on statistics.  Other professionals may differ in opinion with me.

    1. Making decisions before you are emotionally ready. Decisions when you are sad and frustrated lead to, “Where do I sign to get this over with!” reactions. You will often settle for less than you should. Actions made out of anger and revenge often lead to delays in decisions. You ask for or expect too much, “I’ll make him/her pay for what he/she did to me!” Legal fees escalate by thousands or tens of thousands of dollars and the process lasts for years. Solution? Speak to a “family professional,” who will typically be a social worker or psychologist. They are trained to help you sort out your emotions, and even help you with a parenting plan for the children.  Speak with your legal and financial divorce professionals, your medical or spiritual professionals or a local family services organization if you need help to finding someone.  As difficult as it is, be civil and fair regardless of the reasons for your relationship breakdown, and you will benefit with less professional fees, better child adjustment and a more satisfactory long-term arrangement.
    2. Accepting the values placed on your assets by your spouse if you do not have a good understanding of the values yourself. What is real estate worth? How are businesses valued? You should get a second opinion to ensure you get a fair deal.  Normally, a real estate appraisal and an independent business valuator (not your spouse’s accountant) is worth the cost.  Meet with a financial divorce professional to understand how finances will work.
    3. Forgetting that income taxes reduce the value of your assets (or using the wrong tax rate). The family home appraised at $200,000 is worth a lot more than a Registered Retirement Savings Plan (RRSP) of $200,000. After taxes, the RRSP is going to give you a lot less money than selling the home. The RRSP is taxable and the family home is often tax-free.  In addition, once you have divided your property, if you did so on a “rollover” basis to avoid immediate income taxes,  “attribution rules” will apply to capital gains for property sales until you finalize the divorce.   Consider property that you originally purchased but transferred to your former partner.  If property has increased in value since originally purchased by you, you, instead of your former partner, may be required to pay tax on the gain.  To avoid this unplanned problem, you can both agree to file an income tax election under Section 74.5(3) of the Income Tax Act.
    4. Using the pension value for a defined benefit pension plan provided to you from your employer, or your spouse’s employer. These values are typically prepared for employment termination purposes, not for divorce reasons. Pension valuations for divorce are calculated using special rules. The pension administrators work for your employer, not in a separation and divorce environment. Ensure you get the correct valuation.  See my article on Pension Valuations and Equalization of Net Family Assets.  The cost of hiring a pension valuator (typically less than $1,000) is usually worth the cost because of the significant value of pensions.
    5. Not hiring the right person for the right job. Professionals are trained for certain functions, and some have more experience in family law than others. Family counsellors are trained in helping you with your emotions, and in helping you explain things to your children. They can also assist you in working out parenting and custody arrangements. Chartered Financial Divorce Specialists and Certified Divorce Financial Analysts can assist you with your financial needs. These people help you with summarizing your assets for equalizing them between spouses. They also calculate your income in accordance with legal guidelines, which will be used to determine child and spousal support.  Lawyers, of course, will help you use this information to prepare an agreement, and negotiate (or go to court) on your behalf when there are differences in opinions.  Some CPAs and some lawyers will accept you as a client, but may not be family law specialists – you are at higher risk of errors or omissions in such cases, so enquire first. Sometimes, real estate appraisers, pension valuators (actuaries), and Chartered Business Valuators are also needed. In all cases, ask about experience and fees, use the right person for the need, and ensure they are independent.
    6. Giving permission for a “conflict of interest” to your existing family lawyer or accountant. This means that you are allowing your lawyer or accountant to work for your spouse (hence, against you).  You will need to find someone new to work for your best interests. Your professional advisors know you well (or should know you well!). Do you want someone working against you that knows your skill and education levels, as well as your personality? Furthermore, why should you be the one sign off on their conflict? Maybe you should flip the request and ask your spouse to find someone new? My advice is for both spouses to find a new lawyer/accountant just for the separation process. If you are working through mediation or collaborative practice, perhaps your existing professionals can act for you both? However, be sure you are comfortable that the person will be fair to you both.  (If your former partner suggests that keeping the “company accountant” will save money because of their experience with the company, it is likely true.  Just make sure they are working for you…)
    7.  Keeping the family home.  Before you agree to keep the family home, even if it is emotionally important to you and the children, do your budget! Statistically, many individuals need to live off of 25-40% less money after separation, and the house (and mortgage) are often not affordable.  It will be emotionally difficult to move, but not as bad as being forced to move a few years later because of financial ruin.
    8. Tax preparation errors.  Common mistakes include:
      1. Monthly spousal support – Where  spousal support is being received, you cannot agree  with your former spouse not to claim the spousal support as income even if they agree not to deduct it.  The law requires you to report qualifying spousal  support as taxable income.
      2. Eligible Dependant Amount – You cannot claim the eligible dependant amount (EDA) (formerly called the equivalent to spouse amount)  if you are paying child support.  Only the recipient of child support may claim this credit.   In a shared custody situation,  where both parties have custody between 40% and 60% of the time,  the rules are very complex.  If both parties are legally required to pay support, either person may claim the EDA for one child, and if there is more than one child, then it is possible for each parent to claim one child.   This assumes you meet all of the conditions, not just those discussed here (such as being a single parent).  If your  child support agreement states that only one person will pay a set-off amount, only the recipient of the set-off amount  may claim the credit.    If your agreement states that both persons pay each other, with no reference to a set-off amount, and it is clear that you each have a legal obligation to pay support, both parties may claim the credit.   You should seek tax advice from a professional who understands current legislation, and also ensure your legal counsel negotiates and drafts your agreement appropriately to meet your goal.  Unfortunately, while separate payments may save taxes, they may increase maintenance enforcement risks if one person’s payment “bounces”.
      3. Deduct professional fees for support – Legal and financial fees can be claimed by the person receiving qualifying child or spousal support.   Fees related to equalization of assets, obtaining a divorce, or to avoid paying support are not deductible.  Fees in a shared custody situation where both parents are receiving support can only be claimed by the recipient receiving the higher amount; in a split custody situation, both recipients can deduct.
      4.  Child care expenses – If you qualify and pay child care expenses, they may be deductible, but any Section 7 support reimbursement must be deducted first.  And, if you pay the total bill but part of the expense is for your former spouse, your former spouse can claim his or her share (not you), but you must issue a receipt to him or her for their share.
      5. Lump sum payments of spousal support
        1. Payments of arrears are deductible; payments of future amounts are not.
        2. Lump sum payments for arrears arising prior to the date of a court order may be deductible if the court order is worded appropriately to meet the definition of regular periodic payments.  However, lump sum payments for arrears prior to the date of a written agreement (not a court order) are not deductible.
        3. Qualifying payments already paid prior to an order or agreement (i.e. regular, periodic, etc.) may be deductible retroactive to the beginning of the prior calendar year, subject to correct wording.
        4. You cannot transfer a RRSP on a tax-deferred rollover basis to settle a lump sum of child or spousal support.  This can only be done for property.

Finally, make sure you understand the process.  It is difficult in many ways, and knowing what to expect is important.  Call your local Public Legal Education Association (the name varies by province, such as the Community Legal Association of PEI or visit their website, legalinfopei.ca) and see my other articles.

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Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Budgeting Worksheet

When preparing a cash flow budget from scratch, it is difficult to remember everything.  The attached PDF file provides you a form to follow to prepare your own budget.  Just remember to build in allowances for larger items you may only purchase every few years, such as a new car.  For example, if you buy a new car every five years for $20,000, build in $4,000 per year you allow you to save enough for that future purchase.  Likewise for occasional vacations, home renovations, furnishings, etc.

Budgeting worksheet

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Insurance and your Separation / Divorce Agreement

1650Insurance is a key consideration in your separation agreement.  Suppose you have your separation agreement finalized. Your ex-spouse will pay you child and/or spousal support payments for a period of time in the future. Perhaps there is also a balance of the equalization payment from dividing your assets yet to be made in the future. What happens if your former spouse dies before these payments are made? What happens if he or she is disabled and unable to work, and therefore unable to pay you? What happens if you are covered by his or her health insurance, and the coverage ceases? This article will touch on these three topics, but see your own professional advisors for more specifics and before making any final decisions.

Life Insurance
If you want security that you will receive your future payments in the event of death, life insurance on his or her life is one way to guarantee payment. The need for a guarantee of payment should be considered by your lawyer and financial divorce advisor. If insurance is used, it should actually be in place before the agreement is finalized. That way, you will not need to worry about your ex-spouse not following through with the purchase, or being medically declined for coverage. If your ex-spouse is to be insured but is found to be uninsurable, a different settlement may need to be negotiated to make up for this lack of life insurance coverage.

How should this life insurance be set up? If an existing policy is used, or if the paying spouse buys a new policy and is the owner, then the spouse receiving support should be an “irrevocable” beneficiary. Irrevocable” means that the policy beneficiary, i.e., the person receiving support, cannot be changed without that beneficiary’s permission. Unless the designation is irrevocable, the policy owner can change the beneficiary at any time. (As a side note, upon separation, it is typically prudent for a person to review their insurance, RRSP, TFSA and other beneficiary designations to update them. If not updated, and a person enters a new relationship and then dies, their life insurance/RRSP/etc. would go to their previous spouse.)

If the paying spouse is the owner, and the recipient spouse is named as the “irrevocable beneficiary”, there is still the possibility that the beneficiary designation could be changed. This can easily happen with employer group insurance plans – if the employer changes the carrier of plan, a new beneficiary designation would be made with the new plan. Therefore, unless reasonable certainty can be obtained that the irrevocable beneficiary cannot be changed, the policy should be owned by the recipient spouse. This means that the spouse receiving the payments will need to pay the insurance premium.  Consequently, the paying spouse may need to pay additional support so that the recipient has enough cash to pay the premium. Not only would the support need to be increased by the amount of the premium, but also by the amount of income taxes that will need to be paid on the increased support.  Furthermore, the agreement would need to take into account future changes in the cost of insurance premiums as the insured person ages and/or the policy is renewed. Ownership by the recipient spouse would also ensure that the paying spouse does not cease making premium payments, resulting in cancellation of the policy.

If the payer has a large amount of capital on hand, instead of life insurance, another way to guarantee future support payments would be to have the payer buy an annuity that pays a monthly income equal to those future payments. The payer would purchase an annuity in his or her name, which would pay interest-only payments to the recipient. If the payments are for deductible spousal support payments, with proper legal wording, the interest would be taxable to the payer, but deductible as a support payment, which in turn would be taxable to the recipient as spousal support. The term of the annuity would match the support obligation.

Pledging assets as security may be another way to guarantee payments, particularly appropriate for settling a debt from equalizing family assets. However, assets are normally not easily sold to provide cash flow, and often are not of sufficient value to guarantee the full future obligations.

I have discussed life insurance here in relation to protecting support payments coming from an ex-spouse.  This in no way reduces the importance of having life insurance on your own life, especially if you are supporting children.  Child support received from a former spouse is only part of the money needed to raise your children.  Ensure you review your insurance needs with an insurance professional.

Disability and Critical Illness Insurance
While life insurance will protect future payments in the event of death of the payer, what if the payer is unable to continue working because of disability? If the payer is receiving income from employment or self-employment, perhaps you should be negotiating to have a disability insurance policy in place. If the paying spouse becomes disabled and has no other income, that spouse would likely return to court to have the support order varied, resulting in a reduction of support payments. A disability policy would provide him or her with continuing income, enabling them to continue paying.

Use of a critical illness policy could also be considered, which would pay out a lump sum in the event of a serious illness being diagnosed.

Health Insurance
If you are covered by your spouse’s group health insurance plan through his or her employment, this is yet another topic to discuss with your lawyer and financial divorce advisor. Will you continue to have health insurance coverage for you and your children? If your spouse is the parent of your children, continued coverage of the children should be no problem. In addition, certain employer group insurance plans allow an ex-spouse to continue to be covered under the employee’s policy, as long as a new relationship does not commence. Some policies allow continued coverage even if there is a new marriage or common law relationship, if required by a court order. In such cases, the new spouse would not be covered. Of course, coverage could still cease upon employment termination, retirement, death or if the group insurance policy is cancelled by the employer. There are a couple important elements that need to be considered:

    1. Ensure that your ex-spouse does not remove you from his or her policy before the separation agreement is finalized. If you are removed, and you later agree that your coverage should continue, the employer’s policy may not allow you to be added back as a beneficiary because you no longer qualify as a spouse (or because of medical reasons).
    2. Before negotiating on this issue, obtain an understanding from the plan administrator what options are available because many of these plans differ in some respects. It is no sense negotiating to remain on the plan and find out later that it not allowed.
    3. Even if you to remain on the plan, circumstances may arise that prevent you from continuing to do so, such as remarriage of your ex-spouse or cancellation of the policy by the employer. You may wish to consider purchasing your own insurance policy and build the costs into your support negotiations. Remember that the cost will increase as you age.  Another option is to remain on your ex-spouse’s plan, but purchase a special policy in case you need to purchase it on your own in the future. Medavie Blue Cross offers an “Assured Access” policy. As they state on their website, “Once you qualify medically for this plan, you don’t have to qualify again if you lose your group health benefits.” Your health is assessed at the time you apply for Assured Access, and, of course, you may not qualify even then based on your existing health. If your health is currently okay, “To qualify you must be 64 or under and you must be enrolled in a group health benefits plan for the past 12 consecutive months.” Depending on your age, premiums range from $20 to $27 per month (August 2017) for an individual without dependants.  This is another cost to consider in your budget and in your negotiations.

Insurance is an important factor to consider because it protects you from major financial costs. It can also be expensive, making settlement negotiations difficult. However, understanding the pros and cons of having insurance protection is key. Make sure your legal and financial counsellors deal with this important issue, and that you plan and budget accordingly after reaching a final conclusion.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Separation and Divorce – Step by Step Financial Guidance

This is a step by step overview of the separation and divorce process.  I am looking at it from my viewpoint as a financial professional.  However, I hope it will help you be ready for what is to come, and perhaps help you with your preparation.

Note that reaching a separation agreement is not the same as getting a divorce.  They are two separate matters, with partners often being separated for many years before getting a final divorce.

Lawyers and family counsellors will have other opinions and ideas.  This is not a list of things you should do in every instance and it does not include all possibilities.  In fact, these are my opinions and based on my experience.  Proceed based on the advice of your own advisors and your individual situation.  In many cases, you should discuss these items with your lawyer before moving ahead with them. Hire financial and family professionals to help you.

If the lists of things to do in this article look complex, that is because it is. The separation process is emotionally, physically and financially challenging. It will be much simpler and less expensive (but still not easy) if you are able to talk to your partner openly and without anger.  You need to be respectful and fair with each other.

For starters, take steps to protect yourself and your children as necessary – safety first. Call 911 if necessary.  In PEI, with abusive situations, contact the PEI Family Violence Prevention Services at 902-894-3394. There will be similar agencies in other provinces.  I will refer frequently in this article to Prince Edward Island resources, but the principles will be similar in other provinces.

I recommend that you contact your provincial public legal information association.  In PEI, this is the Community Legal Information Association of PEI (CLIA) (1-800-240-9798 / www.legalinfopei.ca).  In PEI, CLIA can provide you with their family law kit, a lawyer referral, and other valuable information, including a Do-It-Yourself Divorce Kit for uncontested divorces. In addition, I recommend that both men and women obtain the publication titled, “Moving On, A Practical Guide for Women Leaving a Relationship”, from the PEI Advisory Council on the Status of Women (902-368-4510 / www.gov.pe.ca/acsw). It explains many of the topics that both of you will face through this difficult process. At the time I am writing this, it is available online at http://www.gov.pe.ca/photos/original/moving_on_new.pdf. You will face challenges – understanding them is a very important first step.

  1. For privacy purposes, consider changing your address. If you are still residing at home, consider renting a post office box. Notify parties of your updated address and contact information. Refer to my checklist titled, “Address Change and Contact Checklist” available on my website.
  2. Decide who will stay in the home.  Decide how the household expenses will be paid. (See Note 1)  Get advice from a lawyer before you move out of the house to ensure your rights are protected with respect to the family home. In addition, while you may be emotionally attached to it, it may not be feasible to keep it. (See Note 2)
  3. If you are moving out of the home, consider taking copies of all financial, insurance, and similar documents.  See my article on Documents You May Need – Separation and Divorce
  4. Before you start negotiating, ensure your emotions are under control.  Speak with a counsellor to help you get through this tough time.  Do not chase unobtainable goals because you want revenge (even if your legal counsel offers to help you or even encourage you to do so).   Do not  settle for too little because of guilt.  Both of these options will likely cause you future financial difficulties.  The reasons for the separation are not relevant in reaching the legal answers in most jurisdictions, so you are likely wasting your money on professional fees.
  5. Meet with a social worker or other family professional (counsellor) to establish a parenting plan for children, including temporary custody arrangements. You will also need to decide on how to manage both physical custody and decision-making affecting the children. Your family professional/counsellor can help you. “Children come first” is the approach used by the legal system when making decisions for separation and divorce. Get advice and read about the impact of this process on your children. Protect your children as much as possible from negative impacts.
  6. Separate your financial obligations from that of your former partner. Unless otherwise agreed, close joint bank accounts, joint credit cards and the joint lines of credit, etc. Set up your own individual accounts. (See Note 3)
  7. If you have authorized people to share your information with your partner, cancel them.  This may include, for example,  bankers, brokers, insurance agents, accountants, tax preparers and government agencies (e.g., the Canada Revenue Agency (CRA)).  If you change tax preparers, advise them to cancel any prior authorizations given to the CRA.
  8. Cancel any active Powers of Attorney for which your partner has the power to represent you (refer to your lawyer on how to do this). Contact any parties directly that you know are relying on the Power of Attorney and tell them it is cancelled.
  9. Change your personal identification numbers (PIN) and passwords.  Keep them secret. Put passwords in place where you may have private information, such as on your cell phone, computer and email accounts. Make them difficult for others to know and never share them with anyone!  Do not use names of family or pets, and use a combination of letters, numbers and symbols.
  10. If temporary child or spousal support is required to meet living expenses, make payment arrangements.  (See Note 4)
  11. Review your household, tenant and liability insurance coverage to ensure it is adequate going forward, especially if you move to a new home or rent an apartment, or if the house is going to be vacant.
  12. Ensure your life insurance is appropriate to support your family going forward in your new circumstances.  Negotiate with your former partner to ensure he or she has sufficient life and disability insurance to meet ongoing support obligations in case of his or her death or inability to work.
  13. If you are a member of your spouse’s group insurance through work, take steps to keep health coverage for you and your children as long as possible.  Do this promptly before you are removed because you may not be able to be reinstated. (See Note 5)
  14. Decide what legal process you are going to use to reach a final separation agreement. There are various alternatives.  Costs will depend on how willing both parties are to work together to reach a solution.  (See Note 6) You have two choices to start – (a) to meet with your professional team early to obtain information and direction, or (b) assemble your financial data first to make the most of your meeting. Regardless of your timing, write down all of your questions before attending any meeting.  This will keep your meeting efficient and minimize your fees. I often meet with individuals to review the financial issues before they meet with a lawyer.  This works well if you want to work things out together and reach some solutions before hand.
  15. Make a list of everything you owned at the date of separation.  Do the same for the date of your marriage.  You should list the values at each date. You may use court approved forms to do this to save some time later. (See Note 7)  You will likely need to update this list later if amounts change significantly after your separation.  Ensure that you use appropriate financial experts. (See Note 8)
  16. Prepare a monthly budget (divide your expenses that are only paid once per year equally to each month). Make two columns.  The first one is based on your past expenses.  The second one is an estimate of your future costs with new living arrangements. (See Note 7)
  17. If you have been separated for 90 days, file Form RC65 – Marital Status Change with the Canada Revenue Agency (www.cra-arc.gc.ca). Also file this form if you re-marry or enter a common-law relationship. For income tax purposes, common-law means once you have lived together with a new partner for twelve months.  This differs from how common-law is defined by provincial law for separation matters.  This CRA form is important to ensure you receive the correct Canada Child Benefit, GST/HST credit, and other amounts that are based on your family income as reported to the CRA.  Unless filed, you may be placed in a difficult repayment position when you file your tax return.  OR, you may miss out on additional cash flow to which you are entitled.  Under payments or over payments, if any, will depend on your personal income situation.
  18. If you are going to court, it is helpful to understand the process and even see the courtroom before you need to go. This will help reduce your stress.  Ask your lawyer if this is possible.  To obtain information about court proceedings, speak to your provincial public legal information association.  In PEI, CLIA periodically holds public information sessions at the courthouse, and you may wish to participate if any are scheduled.
  19. Your negotiations will result in a written separation agreement or a court order.  For a written agreement, ask your lawyer or mediator to have the draft agreement reviewed by a financial expert prior to signing it.  There may be income tax or other financial issues that may impact you in ways you may not expect.  (See Note 8)
  20. In the year you separate, and each year up to and including the year after your agreement or court order is finalized, there may be special tax rules to consider.  This is particularly true when children are involved, for the year when support payments commence and/or for the year you are billed by your professional advisors for helping you receive support. Get professional help with your tax return.  Read the CRA publication regarding support payments if you wish to research more on your own.  Their booklet, P102 Support payments is an abbreviated version of their interpretation document, Income Tax Folio S1-F3-C3.
  21. Will you be paying or receiving support payments that are deductible/taxable?  If so, you must file Form T1158 Registration of Family Support Payments with your tax return in the year the separation agreement or court order is made.  You must attach a copy of the agreement or court order.
  22. Determine whether you should apply for a Canada Pension Plan split, and do so if it is to your benefit. You may do this if you are divorced, or if you are separated for at least a year, subject to limitations in certain situations.
  23. Will you starting a new job? Are you employable or do you need to upgrade your skills and education? Obtain guidance on doing so from government employment agencies.  Discuss your needs with your financial professional and lawyer so that the costs are considered as part of your budget during your separation negotiations. Also, have a talk with your family professional (counsellor) so that you start your job search when the timing is right for you.  This may vary given your emotional and personal circumstances.  If you are employable and choose not to work, and have a spouse or children to support, you may be still be required to make support payments.  Be aware of this financial consideration when deciding your future plans.
  24. You will need to review the beneficiary designations on your life insurance, employer pension plans, Registered Retirement Savings Plans, Registered Retirement Income Funds, Tax Free Savings Accounts, segregated mutual funds and any similar products.
  25. You will likely need to update your Will, Power of Attorney, Health Care Directive and preplanned funeral directions. With respect to your Will, obtain appropriate planning advice if you are entering a new relationship so that you protect the interests of your own children.  If you bequeath your assets to a new partner, your children from earlier relationships may not share in your wealth if you die before your new partner.
  26. Have you transferred ownership of property to your former partner as part of the separation?  Will this property (not counting RRSP’s) be taxable upon its eventual sale by your former partner?  Has the property, e.g. real estate or stock market investments, been sold before your divorce is final? You may have significant tax costs if this occurs because of something called attribution. A special tax election must be filed to avoid these tax consequences, so ensure that your former partner advises you of such sales and his or her tax preparer makes the appropriate elections.  This is not an issue after your divorce is final.

I remind you that children are often a casualty of this process because of the feuding between parents. The effects can be far reaching, effecting their education, emotional wellbeing, and many other elements of their life. Keep this in mind while you and your partner are working through this process, and take steps to protect them.  Be respectful and fair to your former partner for the love of your children.

I hope this article helps you understand some of the issues involved on your path to separation and divorce.  My goal is to help you and your former partner to understand the process and be prepared for certain issues.  Indeed, I hope that it helps you reach fair decisions with lower stress and cost than without any guidance. I encourage you to work together to reach a solution that will be reasonable for both of you, rather than turning to the courts to make a decision.  In the courts, a stranger will be setting the terms of how you will deal with dividing your personal assets and dealing with matters in the future.


Note 1: Often, the person living in the home will pay all of the household operating expenses, such as heat, electricity, telephone, cable TV, etc. This is often called “occupational rent” because these are expenses to occupy the home, while the other partner pays rent in a new location. Paying such expenses assumes that the party remaining in the home has sufficient money to do so. If not, other negotiations related to support payments are required. Mortgage payments, property taxes, major repairs and insurance are expenses to maintain the value of the home, and are often shared equally until a decision is reached on who will take the home, unless it is sold. Then, whomever retains the home will take responsibility for those costs retroactive to the date of separation.

Note 2: Obtain financial advice before you make a decision to keep the house (rather than downsizing to a more affordable living accommodation).  Can you afford the mortgage?  Are you capable of paying future bills?  Are you physically able to maintain it? It is usually financially better to sell the home and share the proceeds, or to transfer it you your former partner.  It is better to give up the comfort and emotional attachment of your existing home than to struggle to feed yourself and your children in the future.

Note 3: If you and your former partner are not getting along, get advice on your banking arrangements.  This is very important for joint accounts and joint liabilities.  There are alternatives, some of which include the following:

  1. Where you can communicate reasonably with your former partner, you can divide the joint bank account equally and close it.  Alternatively, where there are continuing family expenses, such as those related to the family home and for raising your children, you may decide to keep the joint account. You could both deposit money based on a fair arrangement, and agree to spend that money on specific items, such as certain expenses for your children.
  2. You may decide to close joint accounts and pay shared expenses from your own individual bank accounts.  Periodically, you would settle with each other for any balances owing when one person has paid more than the other.
  3. If you close the joint account, and where there is only one income, the working partner may deposit money to the other partner’s bank account for the use of the other partner until a final separation agreement is reached.  This would be considered interim support.

Regardless of how you handle joint accounts, open a bank account in your own name.  This will start the process of building responsibility for living on your own and taking care of your own money. It will also help in case your partner takes the money from joint accounts without authorization.  In addition to dealing with bank accounts, cancel any joint credit cards and joint lines of credit that will no longer be used. If you are unable to repay or cancel them, provide a letter to the issuers to indicate that you will not be responsible for additional debts incurred after your separation date.  Apply for a credit card in your own name – but use it only if you can afford to pay the bill. You will be accountable for the transactions, and its use will help build your own credit rating. Pay it off monthly.  Get monthly statements from joint bank, credit card or loan accounts, or make sure that you have access to the records so you can watch over the account. Contact the issuer to see how to do this if the service is not readily available.

Bookkeeping is very important in all of these situations. Until your separation is finalized, keep receipts and record the purpose of all bills paid from your joint account. Do this also for payments from your own accounts that relate to family matters.  This will help to make sure that bills paid may be properly divided between you and your former partner during the separation process. Separate your bills – those that are your own, those that are shared costs, and those that belong to your former partner.

Note 4: When paying temporary support, I recommend regular bi-weekly or monthly payments of equal amounts be paid to the other party’s bank account. For the payer, this will provide evidence of cooperation in later negotiations.  Also, with regular, equal amounts, they may meet the tests necessary to be tax deductible support payments if a written agreement is reached by the end of the following year. To be deductible, the person receiving the money must have complete control over its use for his or her maintenance, or to support children.  For the recipient, it provides a dependable cash flow that can be used for budgeting purposes, although it may later result in a tax cost (that should be considered in future negotiations.)

Note 5: Seek legal advice if your partner threatens to remove you from his or her group health policy.  If you are removed from the policy, you may not qualify to be added later because of the policy terms. (You may no longer fit the spouse definition).  Many group insurance policies allow a former spouse to remain on a policy if it is required by a court order or written agreement.  If you are a member of a group policy now, but there is risk you may lose this coverage, consider buying a special policy that guarantees your ability to obtain insurance in the future without a need for medical tests.  Blue Cross offers this coverage at a price based on your current health, called Assured Access – ask your insurance agent for more information.  If you do not presently have coverage, investigate whether you should buy your own policy – either through work, an association to which you belong, your bank, a credit card offering, etc. or a private policy.  Obtain several quotations to ensure you get appropriate coverage at the best price, and ensure you can afford the coverage.

Note 6: If you are agreeable on all topics, you may be able to do the legal process yourself. (In PEI, the Community Legal Information Association (CLIA) has a court approved Do-It-Yourself kit that you can purchase for a reasonable cost.) If you have issues to work out, but you are still communicating with each other on a reasonable basis, working with a mediator may be the best solution. Even with mediation, if you are not comfortable with the legal and financial decisions to which you need to agree, you may also want to consult a lawyer and a financial expert (Chartered Financial Divorce Specialist or a Certified Divorce Financial Analyst) Be sure you are agreeing to a fair solution. If you think you would like to have the expertise of a lawyer advocating for you, and you and your former partner are still able to have open communication, you may wish to use the collaborative practice approach. Each party will have a lawyer representing them, together with a neutral financial person and family (mental health) professional/counsellor. You and your former partner will meet in group sessions to work out a mutually satisfactory result. The team members help you reach your own solutions, and ensure that the process is fair. This approach often produces the best solution possible in a difficult situation. If communications with your former partner are strained, or nonexistent, the standard litigation approach may be needed.  Each of you will hire your own lawyer and work independently with that lawyer.  (Contact your provincial legal aid department if you cannot afford a lawyer.)   Even in litigation, working with a financial expert on the numbers will typically still be in your best interest because many family law lawyers are not trained in budgeting, valuations and income tax.  Their hourly rates may also be higher than those of a financial professional.  A mental health professional is almost always an asset – you need to have a clear head to make good decisions.

Note 7: For official forms, see your provincial government web site or visit your provincial public information association site. In PEI, to download a form to create your budget and list your assets and liabilities in PDF format, you can go directly to the Supreme Court of PEI web site forms list.  Other provinces will have similar family law document sites.

Note 8: Chartered Financial Divorce Specialists (CDFS) and a Certified Divorce Financial Analysts (CDFA®) are financial planners trained for working in the separation and divorce field. Certain Chartered Professional Accountants may have significant experience, particularly with tax issues, but not likely at the depth of a CDFS or CDFA®. While family law lawyers will be familiar with the results of financial analysis, most are not trained to do the calculations.  Other financial specialists may also be required.  If you have real estate, consider using accredited appraisers to obtain values (do not use the property tax value); for businesses, a Chartered Business Valuator may be needed to value the business. An actuary trained as a pension valuator will likely be required where one of you is entitled to a guaranteed lifetime pension from your employer (called a defined “benefit” plan), such as paid to government employees.  Pension values provided by employers (such as the federal government) are not normally appropriate for separations. It is important to use an actuary to ensure the pension split is fair if you are accepting a lump sum settlement. For more on the pension valuations, and the reason for the common error in using the wrong value, see my article, Pension Values for Separation and Divorce – A Common Error – Use the Correct Value!  And remember, all assets must be valued after allowing for tax costs – the value of a taxable RRSP holding $100,000 in investments is much less than the value of a tax free $100,000 principal residence.

Note 8: The Income Tax Act and other legislation set out who will receive the Canada Child Benefit, GST/HST credit, etc., as well as entitlements to Canada Pension Plan splitting and how various payments will be taxed. Stating within the agreement that there are certain entitlements or that specific amounts will be taxable or not taxable will have no effect if it violates the law. In particular, the Income Tax Act is very specific with respect to whom may claim tax credits for children.  Lump sum payments also have peculiar tax treatments, sometimes differing between court orders vs. written agreements.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Canada Pension Plan Splitting on Divorce or Separation

Married couples who separated or divorced in 1978 or later and common-law couples who separated after 1986 may be able to apply to share their former spouse’s Canada Pension Plan. When CPP credits are split, one person will receive an increase in their CPP while the other person will have a decrease. The rules vary depending on the relationship and the timing, and are summarized as follows:

    1. If divorced after 1986, you are eligible, regardless of what is stated in your separation agreement, in most provinces. At the time of writing, Quebec, Saskatchewan, Alberta and British Columbia allow you to override this rule in your agreement.  In other provinces, there is no time limit.
    2. If divorced from 1978 to 1986, and you lived together for at least 36 consecutive months, then you are eligible if you apply within 36 months of the date of divorce. After 36 months, you can apply if your spouse is still living and both parties mutually agree to split the credits.
    3. If still married but separated for at least 1 year, you are eligible and there is no time limit to apply except no later than 36 months after spouse’s death.
    4. If you were living common-law in 1987 or later, lived together for at least 12 consecutive months, and you have been separated for at least 12 months (unless your spouse has died), then you qualify if you apply within a time limit of 48 months. After 48 months, you can still apply if both parties mutually agree to split the credits.

Credit splitting calculations exclude years before age 18 and after age 70; for periods when one person is receiving a retirement or disability pension; and for years when the total pensionable earnings is less than two times the CPP basic exemption. For example, for a person receiving a retirement or disability pension, credit splitting is permitted but only the credits for years when the person was not in receipt of these pensions are included in the split calculation. Furthermore, no retroactive adjustments are made to pension income already received.

Credit splitting may have an adverse effect on both partner’s pensions is some situations where the Child Rearing Dropout Provision applies, based on an example provided in this article.

See further information on the Canada.ca CPP credit splitting web site, where you may also download an application.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Overview of Divorce and Separation Issues

Statistics Canada projects that 40.7% of all marriages will end in divorce before the thirtieth anniversary, based on 2008 data.  When people think of separation and divorce, they usually think of younger couples.  However, based on Statistics Canada data for 2008, 31.7% of couples aged 60 to 64 will end their marriage with divorce, although the average age ranges from 42 to 44 years.

Separation and divorce are complex processes filled with the unknown for most people.  This article will provide you with an overview of some of the issues.  Also read my article on Common Mistakes in Separation Negotiations to help protect yourself.

Throughout the process, you need to deal with your stress and emotions.  You are wise to ensure that your emotions are under control prior to making decisions.  This will help you reach long-term satisfactory solutions, not short-term fixes to make the pain go away.  Meeting with a family professional to see if they can help you, even if only for an initial one-hour meeting, is money well spent.  An early issue is finding living accommodations for the person(s) leaving the family home.  Another is arranging custody of your children, should you still have dependent children.  The family professional can help you work through these issues, and refer you to other professionals, such as a lawyer, for help.  Children who are still at home are often impacted for life by their parents’ separation.  The family professional can help you explain to the children what is happening.  They can work with parents to make a parenting plan in their best interests.  These needs tend to be immediate especially in an abusive home.  Your doctor, lawyer or other people you know can make a referral.  You can also check out the websites for collaborative practice groups or mediation associations at the national level (consider the International Association of Collaborative Practice – Find a Professional web site) or search locally in your province (in PEI, see Mediation PEI (www.mediationpei.com)).  Those sites have listings of social workers and psychologists who work in this field.

You can work through the divorce process by various means, which include doing it yourself, mediation, arbitration, collaborative practice and the normal litigation process.  The Community Legal Information Association (CLIA) (www.legalinfopei.ca) can provide you with free information on these processes and much more information related to separation and divorce.

From a financial perspective, there are three key areas for decisions, being division of assets, child support and spousal support.  This is where a Financial Divorce Specialist or an experienced financial advisor can help you.  Legislation and the court will dictate your entitlements if you cannot reach agreement between yourselves.

Your assets, after deducting your debts, are divided based on the value earned while married.  Certain items may be excluded under specific circumstances, such as an inheritance, for example.  One of the challenges is placing values on assets, particularly real estate, pensions from work, and businesses.  Maybe you understand how these values are determined and can mutually agree on them.  Otherwise, rather than argue and spend thousands of dollars in legal fees, hire a real estate appraiser, a pension valuator and/or a Chartered Business Valuator to determine the values of such assets.  Your costs will likely be much lower.  I find that few people understand pension and business valuations, and your settlement could be affected by tens of thousands of dollars if these assets are not correctly valued.  In particular, the value of a defined benefit pension plan may be provided by your employer.  However, this is seldom the correct value for divorce purposes.

If one person has sole custody of the child, your entitlement to child support will depend on the income of the payer.  Where physical106300 custody of the children is shared approximately equally by the parents, it is determined using the incomes of both parents.

Spousal support depends on a number of legal factors.  First, it must be determined that a spouse is entitled to spousal support.  Then, the amount of support must be calculated, which is usually determined after looking at both spouses’ incomes.  Finally, the length of time for which payments must be made, or whether a lump sum settlement is appropriate, needs to be decided based in individual circumstances.

Separation and divorce is a complex and emotional.  Ensure you get good advice, and have an understanding of your rights and entitlements before signing any agreements.  Unless both spouses are fully aware of the impact of their agreement, legal and financial advice is essential.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Finding Hidden Income – Analysis of Self-Employment Income

The goal of this article is to identify the common ways that self-employment income may be understated, either deliberately or inadvertently. This article was written to assist professionals in determination of income for the Child Support Guidelines, but is equally relevant to other uses. In many cases, this is a simple process; in others, it can be quite complicated. Interpretation of personal tax returns and business financial statements is not necessarily an aptitude possessed by those who are involved in this process. Ideally, in complex situations, a professional accountant with a thorough understanding of the Child Support Guidelines will be involved. The goal of this article is to identify the common ways that self-employment income may be understated, either deliberately or inadvertently. If your are aware of these situations, you will hopefully be able to identify situations where further actions can be taken to obtain a fair income figure.

The following questions will be discussed:

  1. How do business owners understate their profits in order to reduce their income for child support and/or tax purposes? How can we find these types of adjustments?
  2. How much reliance can we place on financial statements?
  3. What special issues arise when evaluating farming or fishing income statements?
  4. What payments or personal benefits may be made to spouses and where are they on the financial statements?
  5. Paragraphs 9 and 12 of Schedule III of the Federal Child Support Guidelines relate to payments or benefits to related parties and capitalization of income. What additional comments may be appropriate in these areas to ensure fair calculation of income?

1. How do business owners understate their profits in order to reduce their income for child support and/or tax purposes? How can we find these types of adjustments?

There are two approaches to “hiding” income – legally and illegally. It is less likely that an illegal approach is being used if the financial statements are reviewed or audited by a professional accountant. However, this is not a guarantee. Typical situations to watch for include the following:

  • Illegally under-reporting sales transactions or overstating expenses.

    This is the infamous underground economy. Under-reported sales are typically apparent where businesses insist on collecting cash instead of cheques for sales of goods and services and do not issue invoices. This theory is that these transactions will not be found by the Canada Revenue Agency. There are a few clues available which may detect this type of activity, as discussed later.

    Overstating expenses may include charging many personal expenses through the business, or artificially inflating expenses with false amounts. These items are easier to find by the Canada Revenue Agency because they have access to the detailed books and invoices. For Guideline income purposes, we may only have access to the financial statements.

  • Aggressively, but legally, claiming expenses to reduce taxable income.

    This situation typically arises when a person can make a case that an amount is a business expense versus a personal expense. An example would be an entertainment expense where a taxpayer argues the amount was required to increase future business opportunities, but there is no specific evidence that it was either a necessary expense or that it resulted in sales increases. Paying high wages to employed family members is another possibility.

  • Making short-term business decisions to temporarily defer income.

    Business owners can often affect the timing of their income. While possible in most businesses, this practice is particularly used by farmers and fishermen who elect to report income on the cash basis and by service businesses that can delay their invoicing.

    An example would be where the business owner has confirmed a major sale, but has requested the customer to postpone the transaction until next year, resulting in lower sales and lower income for the current year. Although this will result in higher amounts in the following year, the child or spousal support claims may be settled by that time.

  • Maximizing use of legitimate tax deductions.

    Some individuals are more aggressive at using tax deductions than others. For example, persons who use their vehicles for business purposes may claim expenses for these vehicles. Also, an office within a principal residence may be claimed to the extent that the expenses are reasonable. Other similar situations are legally allowed, but care is required because allocations between personal and business use may not always be reasonable.

    In addition, certain deductions may not require an extra cash outlay by the spouse. An office-in-home can be used to reduce taxable income, but should it reduce Guideline income? The deduction may not reflect an increase in household costs, but rather an allocation of costs that would be incurred whether or not the house was used for work.

Finding the income

To find these types of adjustments, the process starts with a careful review of the underlying financial information looking for unusual amounts, or amounts which result in unreasonable ratios within a financial report. This is an important reason to obtain three years of information, and looking at each year for inconsistencies. A good relationship with an experienced accountant will help you in these situations. Obviously, you should interview your client for leads, since most parents know a lot about their spouse’s business practices. You should ask yourself the following questions after reviewing the financial statements:

  1. Does the spouse make enough income to pay normal everyday expenses?

    If all sales transactions are not being reported, you may find that the income statement consistently reports a very low amount. In this case, you must question how that person can live on such a low income. Of course, in legitimate situations, an individual may be living off accumulated investments from past successes in which case there should be investment income reported on his or her personal tax return. They may be receiving support from relatives, or there may be some other reasonable explanation.

    When looking at net income for this purpose, there are three common adjustments you must make to convert unincorporated business income to cash flow available to the owner. A cash flow statement (also called a statement of changes in financial position) will readily provide this information, if available. Expenses typically include depreciation or amortization, which is a figure deducted for expiry of the useful life of assets used in the business. It may be a deduction for wear and tear on equipment and buildings, or the write-off of goodwill or franchise costs over their estimated useful life, for example. This expense does not use cash, so it should be added back to income to estimate cash flow available to the business owner.

    On the other hand, if capital assets are bought during the year, cash is used but not reported on the income statement. Purchases of capital assets will increase the carrying value of these assets on the balance sheet, but should not affect the income statement other than through depreciation or amortization as discussed above. Likewise bank loan proceeds and repayments are not reported on the income statement. To determine how much income the owner had to live on, these factors (and possibly others) must be considered.

    By way of example:

    Year 1 Year 2 Year 3
    Income reported on income statement $10,000 $10,000 $10,000
    Add back depreciation $1,000 $1,000 $1,000
    Deduct cost of new assets $(20,000) $(10,000) Nil
    Deduct loan principal payments $(1,000) $(1,000) $(1,000)
    Cash flow for living purposes $(10,000) Nil $10,000

    In this case, the same income each year reports three differing results. It also appears that the person is well below the poverty line, on average. You need to look further to see how this person is supporting their household.

  2. Are there big changes in amounts on the income statement from one year to the next? If so, why have these amounts changed?

    This question is particularly important with respect to those items that are discretionary. Increases in such categories as repairs and maintenance, vehicle costs, office expenses, miscellaneous expenses, and similar items may be increased this year for benefits that will occur in the future. Rather than waiting until next year, a major repair or renovation may be done now; an advance supply of office materials may be purchased; advertising may be prepaid, etc. These practices will artificially reduce income this year and be offset by an increase in the future.

    Accountants insist that management carefully scrutinize accounts receivable and inventory to ensure that they are not over valued. Spouses expecting to be involved in child support settlements may take advantage of this.

    An increase in bad debt expense may reflect an estimate by management that certain accounts receivable are uncollectable. If management is aggressive with these estimates, bad debts may be expensed this year, but actually collected and included in income next year. The result is to artificially reduce Guideline (and taxable) income this year with an offsetting increase next year after the child support claim is established. Consistent aggressive estimates could defer income for several years.

    Accountants also want to ensure that no obsolete inventory items are still given a value on the books of the company. To reduce income, a business person may report higher obsolescence on inventory than usual. This, of course, would show up as additional profit at a later date.

    This kind of inventory adjustment is not easy to find. It would result in a lower gross profit margin (see the income statement) on sales this year compared to recent years, but some business profit margins fluctuate on a year-to-year basis for a variety of other reasons. Other than by enquiry of management, your options include reviewing three years’ of financial data and looking for major declines in inventory balances on the balance sheet (without a similar reduction in sales activity) and significant changes in gross profit percentages on the income statement.

  3. Have wages increased substantially, or have bonuses been declared?

    One common legitimate tax planning device is to declare a bonus to the owner at the end of the fiscal year. This bonus becomes an immediate deduction on the financial statements and for tax purposes. However, it is not included in personal income until it is actually paid, which may be up to six months later and in a subsequent calendar year. Consequently, business and personal income is low this year, but the following year, personal income will be higher by the amount of the bonus.

    Also, look for management fees and other amounts that may be recorded as owing or paid to a related party, which need to be assessed for reasonableness and may affect timing of income.

  4. Has capital cost allowance (also called depreciation or amortization) been claimed?

    If financial statements are not prepared in accordance with generally accepted accounting principles, or if they are prepared solely for income tax purposes, then capital cost allowance (CCA) may be claimed one year and not the next. This is often done to manipulate income for tax purposes, and is permitted under the tax legislation. While CCA on real estate is eliminated for Guideline purposes in accordance with Schedule III regardless, changes to other CCA claims may result in unreasonable fluctuations in income.

  5. Other questions to ask

    Sample questions possibly arising on a review of financial statements include:

    • Why has inventory increased so much? (Was spouse going to argue a need for cash under the Schedule III provisions for capitalization of income?)
    • Where did the shareholder obtain the cash to lend to the company (where there is an increase in advances from shareholders)?
    • Why did the gross profit margin on the income statement decrease significantly? (Is spouse understating sales or overstating purchases?)
    • Why did administrative wages increase? (Were there related party wages?)
    • Why did office supplies (or other expenses) rise? (Could it be that some expenses were prepaid or capital assets purchased which should not be expensed?).
    • Why is there a large cash balance on the balance sheet? (Does the cash represent underutilized assets?).
    • Why are prepaid expenses so high? (If the spouse is arguing a shortage of cash, maybe expenses were paid early.)
    • Why are there significant changes in the intercompany loans; what is the degree of trading between related companies; and, are such sales at fair prices?(Do you have the financial reports for all related companies?).
    • To whom were any management fees paid? (If to a related company, this may artifically reduce this company’s income).
    • Are there significant increases in bad debts and wages, which may imply some manipulation of discretionary expenses?
    • What are the reasons for significant changes in sales volume?

The CRA has now provided a web site to help you determine if business revenue and expenses are reasonable based on the particular industry and size of business using Statistics Canada data.  This CRA web site allows you to create a report comparing your business to statistical averages.  If you enter your (or your spouses’s) business revenue and expenses and your expenses are proportionately higher or your gross margins are lower than average, this means one of two things.  You have specific reasons for such a variation – perhaps you quoted too low on a construction contract, or you had unusually high expenses because of equipment breakdowns.  These or other specific items are legitimate reasons.  However, it could also mean that all of your revenue has not been reported. For example, if you are reporting all of your construction material purchases, but not reporting all of your construction revenue, your  gross profit margin will be lower than it should be.  When the CRA uses this tool to do the analysis on your business, and significant variations show up, it will likely trigger an audit.  In a search for unreported income for marriage breakdown purposes, this tool can be used as a basis to at least identify the possibility that some income has been hidden, and form the basis for detailed questioning.

2. How much reliance can we place on financial statements?

Financial statements may be prepared by the business owner, his or her employees, or possibly even by a friend of the owner. In these cases, no overall assessment of reliability is possible unless you know the capabilities and ethics of the preparer. Where accountants prepare financial statements, one of three reports should be attached to those financial statements – a Notice to Reader, Review Engagement Report, and an Audit Report.

  • Notice to Reader

    This report is attached to financial statements that are compiled by the accountant, but may not be checked for completeness and accuracy. These reports need not be prepared in accordance with generally accepted accounting principles, and are typically prepared for income tax purposes only.

  • Review Engagement Report

    These financial statements are reviewed, but not audited, by the professional accountant and the financial statements are supposed to be prepared in accordance with the generally accepted accounting principles, as set out by the Chartered Professional Accountants Canada. Normally, these financial statements will include a balance sheet, statement of income and a statement of changes in financial position (cash flow).

  • Audit Report

    These financial statements are audited, and will be prepared in accordance with generally accepted accounting principles as well. An audit is still not a 100% guarantee of accuracy and completeness, although much more reliable than a review or compilation.

With respect to the above types of reports, the audit is the most reliable, followed by the review. You should exercise the most care when you see a Notice to Reader report. These are not necessarily prepared according to generally accepted accounting principles and may not provide adequate disclosure for you to identify certain important issues. For example, generally accepted accounting principles require that transactions with related parties (except for wages) be reported separately from those with other parties. You should read the financial statements (together with the attached notes) to identify and assess the reasonableness of all transactions.

3. What special issues arise when evaluating farming or fishing income statements?

First of all, these two industries are particularly prone to major fluctuations in income from year to year, and the pattern of income considerations of Section 17 of the Child Support Guidelines should be reviewed. In addition, farming and fishing businesses are eligible to use either the cash method or accrual method of accounting. All other businesses are required to use the accrual method (with certain administrative exceptions where either method would result in practically the same results).

When the cash method is used, income is reported in the fiscal period that the business actually receives the cash, and expenses are deducted in the year that they are paid. In contrast, under the accrual method, income must be reported in the fiscal period that it is earned, regardless of when it is received. In other words, sales on credit terms are recorded as income and taxed, even though the cash has not yet been received. Similarly, expenses are deducted in the fiscal period that they are incurred, whether or not they are paid in that same period.

For example, let us assume that a sale for $10,000 is made on December 15, 1997, with the cash collection occurring on January 15, 1998; the business uses a fiscal year end of December 31. Under the cash basis, the sale would not be reported until 1998 whereas under the accrual method it would be included in income in 1997.

When reviewing financial statements for farmers and fishermen, you will need to identify which method is used. The method may or may not be noted, so you may need to enquire.

Under the cash basis, inventory is not included when calculating income. For example, if $10,000 is paid for livestock purchases during the year, and these livestock are still on hand at the end of the year, no adjustment need be added back to income. The full cost of the livestock purchases is deductible (subject to one exception noted later). Under the accrual method, the cost of this livestock would be removed as an expense because it still represents an asset to the business; the cost cannot be deducted until the inventory’s eventual disposition.

As you can see, two farming or fishing businesses operating with identical results but using different reporting methods could show substantially different income figures. Over many years, these year to year fluctuations should average out. However, the numbers can be manipulated significantly for planning purposes over two or three years and must be examined carefully to determine fair Guideline income.

Typical things to watch for will include the following:

  1. Inventory adjustments

    Even on a cash basis, farmers and fishermen have the option of reporting inventory if they desire. Fishermen may inventory nets and traps, but if they do so, must do so consistently from year to year. On the other hand, farmers have both an optional inventory election and a mandatory inventory adjustment that they may consider, which need not be used consistently.

    When a cash basis farmer experiences a loss for the year, the value of purchased inventory must be added back to income until this loss is reduced to nil. In addition, a farmer may include an inventory amount in income on a voluntary basis up to the fair market value of all inventory. This may be done for various tax planning reasons. These inventory additions to income become automatic deductions in the following year.

    The purpose of this article is not to explain these detailed income tax rules, and further information on the related calculations can be obtained from the Canada Revenue Agency publications. However, you should be aware that these inventory adjustments may be made, and when they are used to increase farming income in one year, they have the opposite effect in the following year.

    When evaluating Guideline income, unrealistic fluctuations may occur because:

    • Inventory inclusions were made this year, and not in prior years, thereby increasing the income above a fair amount;
    • Inventory adjustments were used in the prior year, but were not used or were lower this year. As a result, the current year’s income is lower than would be an appropriate amount for Guideline purposes.

    Your objective will be to review the farming statement to identify whether these adjustments have been made, determine the effect over the three year period which you are examining, and adjust them appropriately. Unfortunately, the appropriate adjustment may not be determinable without knowing the full value of inventory on hand for each year. Not only is this information not required disclosure for Guideline purposes, many farmers would have difficulty establishing a fair inventory estimate on an after-the-fact basis. However, be aware that farmers who participate in certain agricultural insurance programs are required to report their inventory (as well as accounts receivable and accounts payable) on an annual basis to the insuring agencies.

    An increase in purchased inventory on hand at the end of each year will require the farmer to use additional cash. It would seem appropriate to take this into consideration when determining Guideline income. On the other hand, if the size of the farming operation remains relatively consistent from year-to-year with respect to inventory, these inventory adjustments should not be allowed to affect Guideline income.

  2. Income and expense fluctuations

    As noted above, cash basis businesses do not report sales proceeds until actually received. It is a common farming practice to defer sales proceeds until the following fiscal year in order to postpone income taxes. If this is done consistently for the same proportion of income each year, it should not significantly effect Guideline income when looking at a three year time frame. However, an examination of income fluctuations by product line will need to be considered, together with explanations for any changes. Obviously, in farming and fishing, sales will fluctuate dramatically from year-to-year depending upon crop quality, weather conditions, fishing quota changes, pricing fluctuations, crop rotation, etc.

    Changes in expenses from one year to the next should be examined and explanations rationalized. In a farming situation, purchase of livestock, fertilizer, feed and supplies may increase or decrease for several reasons:

    • Changes in inventory on hand as discussed above;
    • Change in size of the farming operation;
    • Change in focus of the farming business, eg. an increase in livestock farming compared to field crops.

    The other change that may occur is capital cost allowance as discussed earlier. CCA may be reported on line 9936 on the farming statement, but you should look at the supporting schedule to determine whether CCA was claimed on all or only some of the assets, and to identify CCA on real estate to be eliminated for Guideline purposes in accordance with Schedule III.

  3. Allocation of personal and business expenses

    Particularly within the farming industry, and to a lesser extent for fishing businesses, certain expenses may be shared between personal and business uses. The most common for both businesses will be motor vehicle expenses, where a vehicle is used for business as well as for personal purposes. However, property tax, electricity, heating fuel, and telephone bills may also be received by the farmer or fisherman as one invoice, requiring an allocation between personal and business uses. There appears to be a natural tendency to omit or understate the personal use portion, and these items should be carefully reviewed. Section 21(d)(ii) of the Guidelines will allow you to request details of this information. Such personal allocations would be covered by the clause, “other payments or benefits paid to, or on behalf of, persons or corporations with whom the spouse does not deal at arm’s length;”. Payment of a personal utility bill would certainly be of benefit if paid by the business on behalf of the spouse.

  4. Other farming and fishing issues

    Other farming and fishing issues will be similar to most other businesses and are covered elsewhere in this paper.

4. What payments or personal benefits may be made to spouses and where are they on the financial statements?

Section 21(d) and (e) of the Guidelines oblige the spouse to provide details of all of this information. Most of these items are required to be reported on the Canada Revenue Agency information slips for tax purposes (T4 or T4A Supplementaries) although they are often omitted. A review of business financial statements may or may not provide clues to these benefits. Typical benefits include the following:

  • Personal use of company automobile;
  • Company paid group life insurance premiums;
  • Company paid personal tax return preparation or financial counselling fees;
  • Interest-free or low interest loans;
  • Gifts, prizes and scholarships;
  • Personal use of company-owned accommodations, such as a house, condominium or apartment;
  • Acquisition of company inventory or supplies.

If these benefits are reported as required by Canada Customs and Revenue Agency, they would already be included in taxable income and in Guideline income. If they are not reported, their fair value should be determined and added to Guideline income. Some guidance on the valuation and taxation of these benefits can be obtained from the Canada Revenue Agency “Employer’s Guide to Payroll Deductions – Taxable Benefits” and Interpretation Bulletin IT-470 Employee Fringe Benefits.

The availability of a company automobile to an individual for personal use is quite common. The Canada Revenue Agency has a number of complex rules to determine its value for tax purposes. You should review the aforementioned guide to determine the actual calculation, but briefly, the general rule for most people (as of 1998) is as follows:

  • Leased vehicles – 2/3 of the cost of the lease plus an annual prescribed rate per personal kilometre driven
  • Owned vehicles – 2% per month of the original cost of the automobile, plus the annual prescribed rate per kilometre for personal driving

Instead of using the prescribed rate per kilometre, 1/3 of the cost of the lease or 1% per month of the original cost may be used if the driver so elects and if business or employment use exceeds 50%.

These rates are changed under various circumstances, such as with lump sum lease payments, if the automobile is used at least 50% of the time for business purposes, or for automobile salespersons. If you agree that the Canada Revenue Agency rules are the best determination of fair value for Guideline purposes, you should study the tax rules further.

In certain cases, a spouse is aware that a business is paying certain personal payments, such as mortgage payments, or that business supplies and inventory are being used for personal purposes. Prior to making an adjustment to Guideline income, it is important to determine whether such payments have already been charged against the owner. For example, certain personal payments might be paid through the business but deducted from the individual’s pay cheque. In other cases, business owners may have loaned money to their company, and personal payments and expenses are used to repay that loan to the shareholder. In these cases, no adjustment to Guideline income would be appropriate. On the other hand, if something like personal mortgage payments are being paid and expensed as a tax deduction by the business, adjustments are certainly required.

In some cases, travel expenses charged to the business may include expenses related to family members who are not required to accompany the owner on the trip for business purposes. These amounts represent personal expenses and should not be deducted as an expense to the company. If they are deducted, they should be reported by the individual as income for tax purposes, or an adjustment should be made for determination of Guideline income.

5. Paragraphs 9 and 12 of Schedule III to the Federal Child Support Guidelines relate to payments or benefits to related parties and capitalization of income. What additional comments may be appropriate in these areas to ensure fair calculation of income?

  • Paragraph 12 of Schedule III states the following: “Where the spouse earns income through a partnership or sole proprietorship, deduct any amount included in income that is properly required by the partnership or sole proprietorship for purposes of capitalization. “Capitalization of a business can be defined as the cash required to establish and operate the business. “Working capital” is required to provide the company with resources to operate on a day-today basis, and this capital can come from several sources. It may be borrowed, contributed by the owner, or retained from operating profits. In a new business, or in a growing business, you will typically see purchase of new equipment, increasing accounts receivable balances owing from customers, and rising inventory. All of these situations create a need for cash, which must come from the aforementioned sources. When a business reports a profit for income tax purposes, this profit may not be available as cash flow to the owner because of these needs. For example, a business that makes $10,000 profit may not have any cash because they have not collected their sales proceeds from a customer yet. A review of the balance sheet and statement of changes in financial position (cash flow statement) will be useful in evaluating this situation. Looking at the balance sheet, an increase in assets does not necessarily mean that profits were required to further capitalize the business. If liabilities increased by a similar amount, the additional cash required was generated by taking on additional debt. If the cash flow statement is produced, it will demonstrate the sources and uses of cash through the year and will greatly assist in making this evaluation. It is normal business practice to obtain a line of credit from a bank to finance increases in accounts receivable and inventory and to borrow using term loans to finance purchases of capital assets (up to certain limits, as dictated by the lenders). An individual could use cash to buy capital assets or to finance increases in other assets deliberately, allowing him or her to use paragraph 12 to reduce Guideline income. You must consider whether loan facilities were available prior to making an adjustment under paragraph 12. The key issue here is to deduct any amount included in income that is properly required for purposes of capitalization.
  • Paragraph 9 states the following: “Where the spouse’s net self-employment income is determined by deducting an amount for salaries, benefits, wages or management fees, or other payments, paid to or on behalf of persons with whom
    the spouse does not deal at arm’s length, include that amount, unless the spouse establishes that the payments were necessary to earn the self-employment income and were reasonable in the
    circumstances. “You must be careful to interpret the phrases “on behalf of” and “does not deal at arm’s length” correctly. This paragraph indicates that all payments to or on behalf of related persons will be added back to Guideline income unless the amounts can be established as necessary and reasonable. The words “on behalf of” are important words. Payments made to relatives, friends, children, or other corporations may be made for the benefit of the parent. Your request for information should be clear that you are requesting any details in this respect. The definition of terms in Section 15 – 21 of the Guidelines are the same as in the Income Tax Act [per Guideline Section 2(2)]. “Not at arm’s length” and “related” have the same meaning, and include the following:

    1. Individuals connected by blood relationship, marriage or adoption.
      • Blood relationship includes a child or other direct line descendent (e.g., a grandchild), or brother or sister. A cousin, niece, nephew, aunt or uncle are not normally included. However, the definition may include a person of whom the taxpayer is a natural parent, as well as a person who is wholly dependent on the individual for support and is under the individual’s custody and control, in law or in fact (or, if not now, was so immediately before such person reached the age of 19). Not included are a foster child in respect of whom the foster parents receive support payments from an agency responsible for the child’s care. However, a stepchild, an adopted child, a son-in-law or daughter-in-law and a step son-in-law or a step daughter-in-law are related.
      • Two persons are connected by marriage if one person is the spouse of the other person or is a brother-in-law or sister-in-law. This connection exists even after death of the spouse. Spouse includes a common law partner. A common law partner is basically defined as a person who cohabits with the individual in a conjugal relationship and either
        • has done so for a full 12 month time period, or
        • the couple has a natural or adopted child
      • Adoption means legal adoption in law or in fact and may be an adopted child, grandchild, parent, etc. of the other person.
    2. a member of a related group that controls the corporation, plus any person related to these persons or corporations.

These definitions of relationships are defined in Section 251 of the Income Tax Act and related Interpretation Bulletins (Interpretation Bulletins IT-419 and IT-513 in particular). You will also note that unrelated persons may be deemed to be dealing with each other at arm’s length based on the facts of a given situation.

With such an extensive list included in this definition, you will want to be sure you obtain the appropriate interpretation. Without proper disclosures, a deliberate reduction in Guideline income by allocations of income to related parties may go unchallenged.

One could argue that some payments to related employees are reasonable for the work done, but that an additional person would not be hired to replace this person if they left. If an existing employee could accomplish the same work, but a related person is hired to justify income splitting for tax purposes, this may not meet the “necessary” requirement. The other focus will be whether the payment is reasonable for the amount of work performed, and this is a judgement based on industry averages for similar work under similar circumstances. However, a key issue here is the fact that these amounts are added back to income unless the spouse establishes their necessity and reasonableness, which puts the onus on the spouse to justify those amounts.


Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum