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Dear Nancy,

I am getting a divorce settlement in the form of a lump sum of money. Other than my house and a small RSP, this is all I will have. I am 68 and not working. I will need this money to pay all my expenses. I have talked to my adviser and there are a few things I am confused about. I am going to have her set up the account so I get a monthly payment into my bank account. She said that the monthly distribution I get is taxable. How can that be since tax was already paid on that money by my ex-husband? How do I have her send me just the money I put in so I don’t have to pay tax? Should I just take what I need from the original amount or just the income? I want to make sure I have some money to leave to my estate. Is that possible?



Dear Rosie,

There are a couple of things I need to clarify for you so you’ll understand better what will be happening. The lump sum settlement will probably go into a non-registered investment account. The income or growth (also called capital gains) is taxable in this type of account. If you don’t already have a tax free savings account (TFSA), and you haven’t contributed to one before, you can contribute $57,500. The income and growth generated from your investments in this type of account are not subject to tax.

The cash flow that you will be receiving monthly cannot be specified as either capital or income. The income you earn on your invested capital is paid into your investment account and either re-invested, sits in cash or is paid to you. The income paid from your investments will, in most cases, be taxable. The same thing is true for capital gains that you earn. At the end of the year, you will get tax slips for the total amount of income you received, and you will need to report any gains or losses resulting from the sale of any investment. In a non-registered account, all income and gains are taxable even if they are derived from funds that were already taxed.

As for whether or not you should use some of the lump sum is more a matter of awareness. If you don’t invest the total settlement amount then you are limiting the amount of income you could potentially earn.

Here is a simple analogy to help you. Granted, it’s not exact, but you’ll get the idea:

Your capital is invested in stocks or, in this illustration, cows.

The cows produce milk - that is your income.

The cows also produce calves. The calves are the growth, as they will grow to increase the number of cows you have and, subsequently, the amount of milk you generate.

If you can cover your expenses using just the milk produced it would be best. You will always have a known amount of milk, or income.

However, if you reduce the amount of cows (taking more money out of your account than is generated), then you not only reduce your income, but also your growth potential. You need to be aware that if you keep reducing cows over time, there will be less income and little growth.

Depending on your income needs, and needs to draw on your original capital, you could conceivably run out of money and you don’t want that to happen, of course. Having a full financial plan done for you with projections and expectations would be best.

Speak to your financial adviser to get a better picture of your known income and fixed expenses. Draft a budget so you know what you are spending your money on and where. Hopefully, you have already done some planning in order to make sure that the lump sum you are going to receive is sufficient.


Nancy Woods is a Vice President, Portfolio Manager and Investment Adviser with RBC Dominion Securities Inc. Visit her blog, “Nancy’s Notes” at or send her your question to