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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

Shared Custody and the Amount for an Eligible Dependant Tax Credit

If separated parents are sharing custody of their child(ren) with their ex-partner, it is important to know the Canada Revenue Agency’s (CRA) current interpretation of the law (April 2019) for each to get their fair share of government benefits.

  • What is shared custody (expected to be referred to as “shared parenting time” under the updated Divorce Act)?
  • How is child support calculated for shared custody?
  • Who can claim the Amount for an Eligible Dependant as a tax credit?
  • Unfortunately, the answer is, “It depends.”

Shared Custody and Child Support

(Relevant reference is Section 9 of the Federal Child Support Guidelines)

The Federal Child Support Guidelines defines shared custody as when parents have physical custody of “a child for not less than 40% of the time.” This means having custody from 40% to 60% of the time. With shared custody, there is flexibility in how support can be calculated. The Guidelines provide that support is still based on the tables, but also considers “increased costs of the shared custody arrangements; and the conditions, means, needs and other circumstances of each spouse and of any child for whom support is sought.” In most cases, each parent’s support obligation is the table amount based on their income. However, adjustments can be made as appropriate for the circumstances. If, for example, the parents are distant from each other, the support amount may be adjusted to compensate for travel costs.

The difference between 39% and 40% shared custody threshold makes a significant difference in the amount of child support being paid by one parent. Equal incomes often result in no basic child support payments required by either party. For sole custody, a $30,000 salary would normally trigger basic child support payments of $442.00 per month in PEI, similar in other provinces. In shared custody with parents having equal incomes of $30,000, the support payment would normally be calculated as each parent owing the other $442.00, with no net amount being paid.

When each parent has the children roughly equal in time, this provision makes sense because each should have similar child rearing expenses. A line between shared and sole custody needs to be drawn somewhere, and the Department of Justice established this 40% threshold in 1997 when the Guidelines were first introduced. When I was on the Advisory Committee for Child Support for the Federal Deputy Minister of Justice in the late 1990’s, this ratio was the subject of much discussion, but no better solution was found.

In summary, unless unusual situations exist, you will calculate support to be paid by each parent using the table amount for each individual’s income. The parties then have a choice: pay each other the gross amount by exchanging payments, or the higher income parent may pay the difference (a “set-off” amount). Continue reading before choosing a preference.

Amount for an Eligible Dependant

(Relevant references being the Income Tax Act subsections 118(1)(b), 118(5) and 118(5.1), the case of Verones v. R (2013 FCA 69) and subsequent case law, and CRA Technical Interpretation 2013-0502091E5)

Section 118(1)(b) of the Income Tax Act allows a separated person living as a single individual to claim a tax credit for a dependent child living with them. There are certain other eligibility requirements but I will not review them here in order to focus on child support issues. This credit is reported on the tax return as the “amount for an eligible dependant” (abbreviated below as “EDA”). It is worth approximately $2,500.

As noted above, when calculating child support obligations, you will be calculating two amounts – one for each parent. I suggest that the wording of the agreement should be similar to this (subject to legal advice):

Based on the shared parenting arrangement and the aforementioned income information of each party, and in accordance with the Federal Child Support Guidelines table, and for the benefit of the child(ren), Parent A shall pay Parent B basic child support in the amount of $Y per month, and Parent B shall pay Parent A basic child support in the amount of $X per month.”

Except in certain limited situations, DO NOT state that one of the parties is going to pay only a “set-off” amount. Why? Section 118(5) of the Income Tax Act states “where the individual is required to pay a support amount” they cannot claim the EDA. This could have created a problem for shared custody – no one would be able to claim the EDA if both parents paid support to the other person. However, Section 118(5.1) was enacted to fix this. This section has been interpreted by the courts to mean that if both parents make individual payments to each other based on a legal obligation to do so, then either parent can claim the EDA for a child. The wording of your agreement or court order must be clear evidence that both parents each have a legal obligation to pay child support without reference to any set-off amount.

If there is one shared child, with the correct wording and if the parents meet the normal qualifying requirements to claim the EDA, they can choose which parent claims the EDA on their tax return. To be fair to each parent, they could take turns from year to year claiming this tax credit (for example, Parent A in even-numbered years, Parent B in odd-numbered years). If one parent is not taxable, then it would obviously be better for the taxable person to claim the credit.

If there are two or more children being shared, both parents can claim the EDA for a child. They must agree on who claims which child.

To warn you again, if the agreement or court order prescribes use of a set-off payment, the parents lose the flexibility of choice if they have only one shared child, and with two children, the parent paying the set-off amount will lose out on the tax credit.

If there is a risk that one parent will not honour their payment requirements, then a set-off arrangement may be necessary. Consider this example. If one parent pays $442 per month, and the other pays $342, then a set-off would be $100. For both parents to get the EDA, a two payment system is the best choice. In that case, the lower income parent must save $342 to have it available on the payment date. Unfortunately, if the $442 cheque received from the former partner on the same day bounces, the recipient is going to be short by $442 for that month. If only a set-off payment of $100 was being paid, he or she would have been short by only $100.

In addition to the legal agreement requiring separate payments as discussed above, consider doing a “side agreement” if there is a risk of non-payment. The CRA has said a side agreement may be acceptable, but the use of the term “may” means there is no guarantee. Preference is for separate payments.

The disallowance of the EDA when a set-off payment is paid makes less sense when you realize that the impact of the EDA is built into the legislated tables of the Federal Child Support Guidelines[1]. By design of the Guideline tables, if the EDA is not shared, the custody amounts are biased against the payer of a set-off payment. Both parties are paying a support amount reduced by the EDA. However, only the recipient of a set-off amount gets the EDA; the payer is left short by this $2,500 credit.

The Minister of Finance, The Honourable Bill Morneau, P.C., M.P., in correspondence to me dated March 21, 2019, stated “Our Government continues to examine the tax system to ensure that it is fair and effective. That said, changes to rules in this area would need to be carefully considered in terms of the impacts on different groups and implications for the tax system as a whole.” His concluding paragraph stated, “Although our Government continues to monitor the issues you have raised, we are not prepared to recommend any changes at this time.”

Concluding Remarks

It is a shame that our political leaders do not appreciate the importance of the EDA tax credit to low and middle income families raising children. Why not share all child related tax credits and benefits equally in shared custody arrangements (including disability and caregiving credits for infirm children)? Why not define “shared custody” in the same way in all legislation? There is always hope that common sense will prevail, and the laws will be changed – which is why you should verify if there have been any changes since this article went to publication.

To review my correspondence to and from various government officials, including the Minister of Finance on this issue, see my web site article – My “Shared Custody” Communications with the Government.

[1] The Department of Justice Canada, Child Support Team Research Report, titled, Formula for the Table of Amounts Contained in the Federal Child Support Guidelines: A Technical Report, sets out the formula used to determine child support amounts. Specifically, it says, “Not included in the calculation of the receiving parent’s taxes are the federal Child Tax Benefit and the GST rebate for children. These are deemed to be the government’s contribution to children and not available as income to the receiving parent. The only difference in tax calculations between the two parents is the inclusion, in the calculations for the receiving parent, of the federal equivalent-to-spouse deduction and certain provincial tax reductions and credits.” The equivalent-to-spouse deduction is now called “the amount for an eligible dependant.”

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

Insurance 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.

Notes:

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