Regrettably, divorce is becoming an all too commonplace event in Canadian society.
Statistics Canada reports that more than 100,000 individuals a year go through divorce and 43 per cent of marriages are expected to end in divorce before they reach their 50th anniversary.
A similarly sad reality accompanying the divorce rate is that few Canadians appreciate the impact divorce can have on their finances and planning for retirement, a Bank of Montreal study has found.
The study showed that married adults who became divorced or widowed between the ages of 67 and 80 were projected to have the largest decrease in wealth and the largest increase in poverty, experiencing a decline in median income of as much as 37 per cent. The most important assets in a divorce were the home first, followed by pensions, investments and then personal items.
“Divorce is a big change in life, and as in all big life changes, people need to talk to a qualified financial planner to see what the implications are before making any decisions,” advises Sara Kinnear, director of advanced financial planning with Investors Group.
“Whereas before the divorce you might have been planning for retirement together, now you may be on your own, solely responsible for making sure you have enough income to retire on,” Ms. Kinnear says. “You want to be sure you know all the options and don’t make any drastic decisions that might lock you into something that’s not best for you.”
Financial experts recommend that before you divide up your assets, find out what the tax implications are. You may find that you can achieve what you want while avoiding or minimizing taxes.
One of the most common questions Ms. Kinnear gets from clients going through divorce is about RRSPs.
In case of separation or divorce, either you or your spouse can transfer existing RRSPs to the other without being subject to tax provided you are living apart when property and assets are settled and provided you have a written separation agreement or a court order.
A couple’s RRSPs often are split between partners during a divorce, but a lot of what happens will depend on the terms of the settlement.
Attribution rules (tax rules to prevent excess income splitting) regarding spousal RRSP and RRIF (registered retirement income fund) withdrawals will not apply to any withdrawals made after you and your spouse have begun to live separately and apart as a result of a breakdown in the relationship. “But your soon-to-be-ex can continue to make spousal RRSP contributions to your spousal RRSP until the date you cease to be spouses – until the date of divorce,” Ms. Kinnear says.
“It’s really advantageous to try and come up with an amicable settlement,” says Jackie Read, a financial adviser with Edward Jones. “Often couples will decide to split assets so one person may end up keeping the RRSP while the other one takes the house.”
If you currently are married or about to get married and don’t want to have to share your assets with your spouse in the event of a breakup, then you should consult a lawyer in your jurisdiction, as rules vary substantially across the country.
“The best protection would be to have a domestic contract, but even without a contract you may be able to protect yourself a bit by keeping your assets segregated and separate,” Ms. Kinnear says.
While income tax rules apply equally to common-law partners and married partners, rules about family property typically don’t apply to common-law partners, although they do in some jurisdictions, Ms. Kinnear notes.
Ms. Read believes many women come out of divorce more financially challenged than men because they have not been as involved in financial matters as their spouses.
“A lot of divorcees may not even have a budget and may never have handled money or investments or paid the bills because their husbands did all that,” she says. “In some cases they may not even have a credit history. It leaves them very vulnerable.”
Ms. Read suggests people coming out of a divorce should set up a budget, review all expenses and start to build their own retirement plan, which should include contributing to an RRSP or, if they are in a low income bracket and can’t take advantage of the tax deferral savings of contributing to an RRSP, maxing out their contributions to a tax-free savings account.
For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season section for daily updates.
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