The ending of a marriage or common-law partnership can be one of life’s most stressful events. That’s why it’s important to understand how a relationship breakdown can profoundly impact your financial future.
The laws surrounding the break-up of a marriage or common-law partnership can be complex, and there are legal considerations that you may not be aware of. If possible, seek professional legal advice before you make the decision to separate or divorce, as decisions made early in the process could affect your rights in the future¹. Although separated and divorced individuals have similar financial and tax planning considerations, there are some nuances in the tax law which may affect individuals differently. In addition, family law varies according to the jurisdiction in which you reside, and the situation can be further complicated when there are children involved.
Ending a relationship can be a major life event, but it doesn’t have to derail your plans. During a separation or divorce, these six considerations can help you to protect your financial future:
1. Realize the tax implications
Couples often fail to consider (and plan for) the tax implications of splitting up. The division of property can be complicated by the tax consequences of transferring an asset to a spouse. Also, when family assets are divided during a separation, there may be tax implications based on the value of the asset before, during and after the relationship ends.
For the purposes of the Income Tax Act, common-law couples who have lived together for at least 12 months, or who are raising a child together, are treated in the same manner as married spouses. Keep in mind though, that the tax implications of a separation and the application of the rules under the Income Tax Act can be varied and may also depend on personal circumstances.
Always seek professional tax advice to determine the after-tax value of all family assets to ensure an equitable division.
2. Know your rights
When a relationship breaks down, there can be variations in the division of assets depending on where you live. It also makes a difference if the relationship was a marriage – which is governed by federal law – or a common-law relationship, which is subject to provincial or territorial statutes. Another important factor is whether or not you have a domestic contract such as a cohabitation agreement or marriage contract in place.
Generally, a couple will separate first, and then divorce afterwards. As there are certain rights that expire once a couple is divorced, it is extremely important to ensure that all aspects of any division of property are addressed before signing a final separation agreement or obtaining a divorce certificate.
If you do decide to separate, note the exact date on which the separation starts as it can be important later on. In some jurisdictions, it is the value of property as at the date of separation which is relevant when dividing property and, in many jurisdictions, certain rights will only continue for a set amount of time after the date of separation.
3. Formalize it with a separation agreement
Once the decision to separate has been made, it should be put down in writing. Before signing a separation agreement, it’s essential that each spouse provide full financial disclosure and obtain independent legal advice. The separation agreement is a way to formally address separation details and outline how certain tax benefits or implications will affect both parties. It can include:
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If one of the spouses will be making spousal support payments and whether they will be tax deductible.
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If the separating couple would like to transfer property such as an RPP, RRSP or RRIF without triggering any immediate tax consequences.
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Clarifying the entitlements to (and tax implications of) the principal residence exemption of both spouses during and after the marriage or common-law relationship.
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Whether the separating spouses wish to elect out of the potential attribution of capital gains on assets sold by either spouse after the time of separation, if any of the assets were transferred on a tax-deferred rollover basis to the other spouse.
- The impact on tax filings such as the spousal credit, pension income-splitting and tax-deferred rollovers.
It is best to have the separation agreement drawn up by a legal professional to ensure that all relevant aspects are covered.
4. Understand the division of family property
If you are married, subject to the terms of any existing domestic contract, the value of all family property will be divided or equalized regardless of which spouse holds title to the asset. However, where you live can define how family property is to be divided.
Common-law couples cannot assume that the family property laws of their jurisdiction will apply to them. In some cases, only married couples can make a court application to have their assets divided according to provincial legislation. However, certain jurisdictions have amended their legislation to entitle common-law partners who meet certain preconditions, such as living together for a certain period or registering their relationship with the provincial government, to apply for a division or equalization of family property.
5. Establish which assets are shareable
While the value of all assets that were acquired (or appreciated) during the marriage are shareable, including properties, vehicles, furniture, personal effects and retirement assets (pensions, RRSPs, RRIFs, etc.), the jurisdiction in which you reside can have varying rules around specific assets.
For example, in some jurisdictions, the matrimonial home enjoys a special status with the entire home subject to division regardless of when it was acquired. In other situations, some assets may be specifically excluded, such as gifts or inheritances.
The process of dividing family assets can be a fraught one, and it’s important to understand all of the variables that can complicate matters. Here are a few key details to consider:
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Which assets must be included in the calculation? Are all of the assets owned by either spouse to be considered? Will the value of some assets acquired prior to marriage be excluded? Will some assets be excluded because of a special status (e.g., a matrimonial home) or because they are inheritances or gifts?
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How much are the various assets worth? Is there an inherent tax liability that must be considered when determining the after-tax value of each asset? Should the value of an asset, such as a pension, be discounted to take account of the fact that it may not be accessible for some time?
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How will payment be made from one spouse to the other?
It is important to seek legal advice from a family law professional in your jurisdiction to understand how your personal circumstances could affect the division of shareable property.
6. Review your estate plan
When a marriage or relationship breaks down, it’s a good time to review your estate plan to ensure that it reflects your current life situation and your final wishes. Lydia Potocnik, Head of Estate Planning & Philanthropic Advisory Services with BMO Private Wealth, knows how important it is to understand the rules that apply to your particular circumstance. “For example,” Potocnik says, “as of January 1, 2022, marriage will no longer invalidate a Will in Ontario. This is a significant shift within estates law. This will result in a notable change in strategy as Wills should now be drafted with greater consideration given not only to potential future children but a potential future spouse as well.” Potocnik urges individuals to keep in mind that “because estate laws vary by province, it is important to note that the new changes in Ontario may not reflect the laws in BC or New Brunswick for example.” She notes that “seeking advice from a qualified lawyer in your province is critical when going through a separation or divorce.”
Update your Will
Couples will often opt to make each other the beneficiary of their estate in their Wills and/or appoint each other to be the executor. Depending on the jurisdiction in which you live, a separation or divorce may or may not impact certain gifts given under your Will. As a result, it’s best to review your Will and consult with a legal professional about how this may affect you.
Review your beneficiary designations
Much like with Wills, couples often designate each other as the beneficiaries of their registered plans and life insurance policies. Following a separation or divorce, it’s important to review your beneficiary designations to ensure that they still reflect your intentions. “Once you finalize a separation agreement,” Potocnik says, “it is important to review your beneficiary designations on RRSPs, RRIFs and TFSA accounts, as well as insurance policies.” She notes that “these designations will apply regardless of what your separation agreement states and could result in your ex-spouse or partner receiving these assets at the time of your death which may not reflect your ultimate wishes.” Potocnik advises those experiencing a break-up to keep this in mind as “often individuals forget to update these designations after separation which can result in unintended consequences.”
Review titles of property held jointly
With shared real estate, couples usually own this asset as joint tenants with rights of survivorship. This means your ex-spouse will receive such assets in the event of your death, regardless of the terms of your Will (except in Quebec, where there is no “right of survivorship” on jointly held assets). You may want to consider changing the registration of these assets to tenants in common or dividing the assets so that they can be left according to your intentions.
Upon separation, speak with a legal professional about your estate plan and the changes that may be required to reflect your current situation, your obligations under the terms of your separation agreement or divorce order, and your intentions for your assets on your death.
We Can Help
Whether you are contemplating separation or navigating a divorce, Potocnik stresses the importance of speaking with a legal professional. “It is important to get estate planning and family law advice at any major life event stage,” she says. “A lawyer specializing in estate planning and family law can advise you of any legislative changes in your province and guide you on how best to protect your rights.”
Know that the end of your relationship may mean changes to some of your life goals and any accompanying estate or tax planning. But thoughtful preparation can create opportunities for new beginnings. During this challenging time, we can help.
For more information, please contact your BMO financial professional.
1 Matrimonial property laws in Quebec differ from the common-law provinces’ matrimonial or family law regimes in the rest of Canada. This article does not focus on issues pertaining to Quebec Civil Code. It is advised to seek professional legal advice if you and your spouse are in a matrimonial or civil union in Quebec.
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