I remember my grandfather many years ago getting a root canal. He told me that he'd prefer just about any misfortune over a root canal any day. I have to believe that thousands of Canadians feel differently. I'm thinking of the many people who have gone through - or are going through - a marriage breakdown. Between divorce and a root canal, the dentistry may look appealing - and definitely much easier on the wallet.
If you are going through a separation or divorce, there is plenty to consider from a financial perspective. Let me share a couple of stories to demonstrate the point.
Jack and Jill
Jack and Jill have been married for 10 years and have decided to separate.
Over those 10 years both earned income and created registered retirement savings plan contribution room. Jack earned $100,000 of RRSP contribution room over that time, and Jill earned the same. Each year for 10 years, Jill contributed $10,000 to her RRSP, for a total of $100,000 in contributions. She fully used up her RRSP contribution room over that decade. Jack, on the other hand, did not contribute anything to his RRSP because he was busy paying down their mortgage.
The result? Jack still has $100,000 of RRSP contribution room, Jill has an RRSP worth $100,000 (let's assume no growth over the past 10 years, to keep the example simple), and the couple have a home worth $500,000 with only $50,000 left on the mortgage.
The couple have decided that they will sell the home and split the $450,000 of equity ($500,000 value less the $50,000 mortgage), and they intend to split the RRSP assets worth $100,000. Not an uncommon strategy. Seems to make sense, right?
But there is something else of value here: Jack's RRSP contribution room. Jill is not exactly thrilled that, once they split up, she'll have an RRSP worth $50,000 (half of $100,000) even though she has used $100,000 of contribution room over the past 10 years. Jack will walk away with an RRSP worth $50,000, but he won't have used any of his own RRSP contribution room - and will still have $100,000 available to be used in the future. It is not allowable for Jack to transfer some of his RRSP contribution room to Jill. And she's not happy about that.
What can be done? The couple could come up with the money to make a $50,000 contribution to Jack's RRSP (using half the contribution room available). This contribution could then be transferred to Jill's RRSP when they split the assets. That would effectively allow Jill to benefit from Jack's RRSP contribution room. Jack would get the tax deduction, of course, but Jill's retirement assets would receive a shot in the arm. (It will be a negotiation, however, as to whose resources will be used to finance the $50,000 contribution.)
Fred and Wilma
Fred and Wilma have been married for 15 years. They own a home in the city worth $500,000 and a cottage in Muskoka worth $400,000. They also own investment assets worth $900,000. They want to split the assets 50/50. Wilma has never cared much for the cottage and would rather live in another part of the city, so she suggested that Fred take all the real estate, valued at $900,000, and she would take the investment assets worth $900,000.
The problem with this strategy? Once Fred and Wilma have entered into their separation agreement, they will each be entitled to their own principal residence exemption. As long as they are married, they can shelter only one property from tax using that exemption. If Fred were to take both properties, he would be able to shelter only one of them from tax. If he were to sell one of the properties, he could run into a tax problem.
It would make more sense for Fred and Wilma to each take one of properties; this would allow each of them to utilize their own principal residence exemptions to shelter their respective properties from tax. The Canada Revenue Agency is the loser in that scenario.
While emotions can run high when assets are divided after a marriage breakdown, it will pay off for both of you to consider the tax implications of the assets you each take, and to reduce the taxman's share.