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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