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In Canada, about four in ten first marriages end in divorce.1 Breaking up is never easy, but you can ease a lot of the stress by staying on top of the financial side. Here are some tips to help you steer through the process.
Essential first steps typically involve the following.
Compile a list of what you own and what you owe. You may be required to provide an estimate of the future value of your investments, sometimes projected to retirement, and to estimate the after-tax value of specific assets that might be sold and shared.
Update beneficiary designations. If your spouse is listed as beneficiary of your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), name a different individual or your estate. The same applies to your Tax-Free Savings Account (TFSA), whether your spouse is named as beneficiary or successor holder. Update your will, assuming your spouse is listed as a beneficiary and perhaps executor.
Notify the CRA. If you have children, notify the Canada Revenue Agency (CRA) so the Canada Child Benefit amount can be adjusted. When the lower-income spouse has primary custody, the benefit amount typically increases. With shared custody, each parent receives 50% of the benefit amount that would’ve been received if he or she had primary custody.
Carrying out the legal terms
Divorce commonly gives rise to investment oriented issues, such as the following.
Dividing RRSP assets. If you are required to split your RRSP assets with your former partner, the Income Tax Act allows you to make a non-taxable transfer from one RRSP to the other.
Transferring TFSA assets. Special rules also apply when the divorce order or separation agreement specifies TFSA assets. A transfer can be made from one Staying on course through divorce TFSA to the other without any effect on the contribution room of the person receiving the payment. The transfer is not dependent on having available room and doesn’t affect current or future contribution room. Note, however, that the spouse making the payment cannot add the amount back to contribution room, as would happen with a withdrawal.
What to do with a cash settlement. If you receive a cash settlement, we can help you determine how to invest the sum. It takes some planning, as your investment objectives likely cover near-term needs, medium-term goals and retirement savings.
Starting a new chapter
Once divorce proceedings are behind you, life takes on a new direction, often with changing financial needs and goals.
Revisit your financial plan. If you’re paying spousal and child support, you might find it more difficult to maintain the same lifestyle and contribute the same amount to investment accounts. Perhaps a settlement you paid has you concerned about your nest egg and retirement date. Our guidance can help you take control and give you confidence that you’re staying on track.
Review your insurance needs. If you have primary custody of your children, you need sufficient life insurance, disability insurance and perhaps critical illness insurance to protect them. There’s no longer a second income to rely on if something happens to you. Even if you already have group coverage through your employer, you may need extra individual insurance to meet new needs.
Revise your estate plan. When you were married, your RRSP or RRIF assets could roll over tax-free to your spouse upon your passing. Unless you remarry, these assets will now become taxable income in the year of your death. You’ll want to adjust your estate plan to manage the tax liability.
If you are separating or divorcing, please reach out to us. Staying on top of financial planning will make a healthy difference.
1 Vanier Institute of the Family, Families Count, 2010.