Financial Planning Through Separation or Divorce

Separating from a spouse or common-law partner can be an emotionally difficult and complicated experience. Relationship breakdown is also one of the most significant, and often unexpected, financial planning risks a person can face.   That’s why it’s critical that you understand how a separation or divorce may affect your financial well-being and succession plan.  

In this article, we’ll outline a few things you may need to do in the event of separation.  Please note: the rules differ between Canadian jurisdictions.  Our goal is to highlight actionable tips that all Canadians may consider.  However, it’s important to get expert legal advice specific to your province or territory.

  • Create an inventory of your assets and your spouse’s assets.  If you are legally married, you may be entitled to a division or equalization of family property (or family patrimony in Quebec), including the property owned in your spouse’s name alone.  Even common-law partners have the ability to apply for a division of family assets in some Canadian jurisdictions (although not all).  Your IG Consultant can help you organize your affairs so that you are equipped with the required information when you go see your family lawyer.
  • Access to Credit. It may be advisable to inform your financial institution that you will not be liable for any charges incurred by your spouse after the date of separation, and, if possible, close all joint lines of credit and open separate ones. If you are the primary credit cardholder on a credit card, be aware that you will likely be liable for any charges made on the card by a secondary cardholder (which is usually a spouse, but which could also include a child instructed to make a purchase by a spouse). You may want to cancel any credit cards where you are not the only cardholder and obtain new ones.
  • Government Benefits. If you are in receipt of government benefits (such as the Canada Child Tax Credit, GST credit, etc.), you should immediately inform Service Canada (or the applicable government agency) of your change in marital status, as this could impact the amount you are entitled to receive.
  • Create a new financial plan.  Now that you are single, you will need to work with your financial planner to ensure that your retirement or other savings objectives are still achievable.  If your retirement plan originally included your spouse’s income as part of the assumptions, you may need to adjust your plan to reflect your changed circumstances.
  • Transfer Assets Tax Effectively.  When you and your spouse are dividing your family assets, take into consideration any tax liabilities which may be attached to those assets. For example, if one spouse receives a principal residence that has no tax liability (because of the principal residence exemption), and the other spouse receives investments of equivalent face value that have an unrealized capital gain, the spouse receiving the investments will receive less on an after-tax basis. A tax professional can help you to determine the after-tax value of each of your assets to ensure a more equitable division.
  • Review your Estate Plan.  Your estate plan could be significantly impacted by a change in marital or relationship status. When you separate, speak to an advisor about your estate plan, and the changes that may be necessary to reflect your new life situation, including possibly signing a new power of attorney (referred to as a mandate in case of incapacity in Quebec). You may also need to sign a new will and possibly update your beneficiary designations.
  • Review your Insurance Needs.  At the time of separation, you should review your insurance needs with your IG Consultant to determine if any additional insurance is required.
  • Speak to a Family Lawyer.  Generally speaking, it is a good idea to speak with a family lawyer as soon as possible (in a best-case scenario, even before you make the decision to separate), since decisions made early on in the process could affect your rights well into the future.

In most cases, the best method by which to address the issues discussed above is to sign a separation agreement. As these agreements can become quite complicated, it is always recommended that each party obtain independent legal advice from an experienced family lawyer. If the issues are contentious, then a court order may be required. However, if the parties are able to come to an out-of- court settlement, then it is important to reduce this agreement to writing.

Ending a relationship can be a major life event which requires you to adjust both your short and long-term plans. In addition to your immediate financial concerns for day-to-day living, please speak to your IG Consultant about the future financial well-being for yourself and your loved ones.