How to Prepare Financially for a Divorce

how to prepare financially for a divorce

Going through a divorce is rarely an easy process. A marriage is an emotional and financial partnership, so it can be difficult to separate all the pieces. Being prepared is the best way to ease the stress around the financial portion of a divorce. Read on as Liu & Associates highlights a few steps that will help you through this process.

Make a List of All Assets & Liabilities

When preparing for divorce, the first step is to figure out exactly what you and your partner own and owe, both as an individual and as a couple. Gather copies of any and all important documents relating to your assets and liabilities and keep them in a safe, centralized location so you’re not scrambling to find information. Examples of assets may include:

  • Bank accounts (joint and separate)
  • RRSP’s
  • Insurance policies
  • TFSA’s
  • Employer pensions
  • Your home

It’s also important to note your liabilities as well, which may include:

  • Loans
  • Credit card debt
  • A mortgage
  • Student loans

Overall, the better you understand your current financial situation, the better position you’ll put yourself in when negotiating a settlement.

Check Your Credit

It’s a good idea to know your credit going into a divorce so you know what you can expect after everything is finalized. There’s nothing worse than trying to start your new life and not being able to get a loan due to poor credit. It’s not uncommon to be held responsible for debts incurred by your spouse, so by knowing your situation ahead of time, you can seek the appropriate help moving forward.

Ensure Beneficiaries Are Updated

It’s a good idea to go over and update your beneficiaries after any life-changing event, divorce included. Make sure you update any retirement plans, insurance policies, estate documents, etc. to reflect your new situation. Failure to remove your ex-spouse as a beneficiary can result in your ex-spouse receiving benefits even though you’re no longer together.

Inform the Canada Revenue Agency

After everything is finalized, be sure to let the Canada Revenue Agency (CRA) know. Changes in marital status may affect what tax benefits and credits you are eligible for on your next return.

Talk to a Financial Advisor

There are many moving parts to deal with in a divorce, so it can be useful to seek the help of a professional. An accountant or financial planner can help you to understand the financial and tax implications of a divorce and can help navigate you through the process.

Still have questions? Contact the team at Liu & Associates and book an appointment with a financial planner today.

Tax Implications Of Divorce

tax implications of divorce

While divorce and separation have bad reputations, they actually can lead to happier and better functioning families overall. Every case is unique, so there is a lot to consider when embarking on this difficult and emotionally challenging process. As with marriage, there are financial consequences to divorce or separation— most importantly when it comes to taxation. If you are undergoing or planning to divorce or separate, consult Liu & Associates’ guide below to the tax implications of this very common life change.

 

 

UPDATE CRA

First things first, you should update you and your spouse’s status with the Canada Revenue Association. It may seem like paperwork that can be put off for later, but it can actually benefit your economic standing. For tax purposes, a marriage or common law union is considered over after 90 days of living apart. Following this, certain credits and benefits can increase because CRA no longer calculates based on a joint income.

SPLITTING ASSETS

In most divorces and separations, assets of the family are added together and split down the middle for redistribution. Often it makes more financial sense for one partner to keep investments such as Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TSFAs) because cashing them in to split the funds means the entire amount is taxable. Keeping them invested and allowing the other partner to hold other assets like the family home can mean less tax paid by both parties. If you own two properties, each party can claim the principal residence exemption and avoid taxes on the sales of the properties.

SUPPORT PAYMENTS

Family law is intricate, but there is a general rule of thumb when considering the taxes on support payments due to divorce and separation. Firstly, the recipient of spousal support pays taxes on it and the payer can use the amount as a deduction against their taxes owed. Child support is different: the recipient is not taxed on the amount and the payer cannot use it as a deductible.

DEPENDENT CREDITS & BENEFITS

Unfortunately, children and other eligible dependents are often caught up in divorces and separations. While this can lead to a better life for the individual, it does complicate the credits and benefits received from the government for their care. Regardless of shared custody, only one spouse can claim the eligible dependent tax credit– on the other hand, the Universal Child Care Benefit (UCCB) can be split between both partners.

As you can see, there are many taxation issues to consider when tackling the financial outcome of a divorce or separation. Family law and tax law are independent fields, but the accountants here at Liu & Associates are prepared to answer your questions with our years of professional experience. There are exceptions to every rule, so make sure you contact or visit us today!