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Breaking up is hard to do
Glenda Baker, Senior Financial Advisor
Jane Shanks, Regional Vice-President
Agenda
The facts
Divorce models
Knowing your boundaries
Divorce professionals
Case study
How to help your clients
Divorce: the numbers
43% of marriages end in divorce before the 50th wedding anniversary
70% of men and 58% of women will re-marry
35 year itch: “grey divorce” is a growing trend
Increasing number of clients in 2nd and 3rd marriages
Divorce rates 2.5 times higher for people in remarriages
Fears among baby boomers
Being alone
Failing again
Becoming financially destitute
Never finding another to live with or marry
Staying angry or bitter over time
Depression
Not seeing children
Attribution on property transfers between spouses and common-law partners
Property transfers after separation or divorce
No tax on transfers of a capital property to a spouse/former spouse if the transfer is in settlement of marital property rights
Automatic rollover at ACB, unless elect out of rollover to transfer at FMC
IT – 325R2 – Property Transfers after Separation, Divorce or Annulment
Property Transfers - residential real estate
Family Circumstances
& Goals
Tax Implications
Ownership & Use
Property Transfers: Who gets the Principal Residence Exception
A family is allowed to designate one property as a “principle residence”
Vacation property may qualify as the principal residence: “ordinarily inhabited”
Can only claim one property as the principal residence for the same years of ownership
Separated couple is not automatically entitled to two principal residence exemptions
Must be living separate and apart for a full calendar year
Property Transfers: RRSPs and RRIFs
Transfers as a result of separation or divorce can be tax deferred if:
Transferred directly to another
registered plan
Transfer is made pursuant to a court order or
written separation agreement
Form T2220
Property Transfers: RRSPs and RRIFs
Planning
Point
If there is a significant difference in marginal
tax rates, this is an effective way to satisfy
equalization obligations
Property Transfers: TFSAs
Direct transfers as a result of separation or divorce are classified as “Qualified Transfers” if:
Living separate and apart
Transfer is made pursuant to a court order or
written separation agreement
No impact on either person’s contribution room
Planning
Point
If they withdraw and then pay dollar amount, the amount is added to the
unused contribution room and can be re-contributed
the following year
Property Transfers: TFSAs
Deductibility of support payments
Periodic payments made
pursuant to a separation
agreement or court order are
generally deductible
Lump sum support
payments generally not tax
deductible
Deductibility of support payments
James v. The Queen, 2013 TCC 164
Divorce modelsWhich one is right for you?
Kitchen Table
Do-it-yourself
Couple mutually agree on settlement
Once in writing must seek independent legal advice
May be giving up valuable
rights
Quick, inexpensive
and less outside
influences
Kitchen Table
Litigation
Each party hires a lawyer to advocate their positions
Lawyer’s duty to get best deal for client
If agreement can’t be reached then court will decide
Court proceedings
are public and can be very expensive
Resolution for people who can’t settle
Litigation
Mediation
Couple meet with mediator to discuss issues and negotiate settlement
Mediator doesn’t take sides, make decisions or give advice
Still need independent legal advice
No advice from mediator
Both parties have
opportunity to be heard and assisted by a neutral party
Mediation
Collaborative
Each party hires a lawyer specifically trained in collaborative process
All formally agree to work together in a respectful and honest manner
Encourages an understanding of each party’s interest and concerns
Collaborative
Team must withdraw if
unable to settle
Couple focuses on ways to
restructure so everyone’s
needs are met
It is common for divorcing clients to ask for your help
…tell clients how much support they will receive/pay
…tell clients what assets they should receive
…share information about one spouse to the other
…provide legal, accounting or valuation advice – unless you have those credentials
What can’t you do?
DO NOT
Identify conflicts of interest
Provide statements for assets as of date of separation and ACB (to owner)
Help them understand that their financial life will change (now 2 households)
Underwrite any new insurance needs once determined
Separate clients’ file (his/hers)
Refer to Divorce Professionals
DO
What can you do?
Divorce Professionals
Family law lawyers
Collaborative lawyers
Family health professionals
Child counsellors
Mediators
Business valuators
Accountants
Financial divorce professionals (FDS/CDFA)
Role of Financial Divorce Professionals
Helps each spouse establish needs and hopes for the future
Examines financial issues, does not provide legal advice
Assists spouses in gathering documents
Provides financial analysis taking into consideration inflation and tax consequences
Counsels clients on developing realistic budgets
Role of Financial Divorce Professionals
Assists lawyer in designing a settlement proposal that will maximize both spouses’ satisfaction
Provides insight into pension plans, investments and insurance
Determines assets that may not be divided
Educates clients about tax and other financial consequences of retaining or giving up certain assets
Role of Financial Divorce Professionals
Hands back clients to their financial advisor for implementation of settlement, future planning and asset management
Provides unbiased presentations that show short-term and long-term financial impact of a proposed settlement
Offers insight into pros and cons of various settlement proposals
Case Study
Tom and Katie are splitting up!
Background Information
Tom• Aged 42• Engineer• Salary $150K
Katie• Aged 44• Stay at home Mom
• 11-year relationship
• 2 children, ages 9 and 11
They have been separated over 2
years and have not yet completed a
separation
Background Information
Katie realizes she will have to go back to work at some point
Tom knows that he has not been paying the right amount of child or spousal support
Both Tom and Katie realize that Katie will need to upgrade her skills before
re-entering the workforce
Katie has told us she has huge trust issues
See any red flags so far?
What do they want?Ask and listen!
Tom wants to keep his pension
Katie wants to keep the house
Tom wants to shorten the number of years he pays child support
They both want their kids to maintain their activities and four years of post-secondary education
Gather information
Provide them with a checklist of documents needed
Assist with the completion of legal reports
• Form 13.1 Financial Statement• Net Family Property Statement• Future Budgets• Order Pension Valuation
Statement
Case Study
A financial divorce professional identifies beyond the division of assets today to see what effect it will have on
each party in their new life
What did the process look like?
Detailed Calculations:• Back spousal support• Back child support• Tax consideration• Child tax credit
consideration
Compiled and analyzed all the information
Completed the draft Net Family Proper
Statement
Ran scenarios based on their desired goals and division of assets
Our findings in Round 1Yikes!
We ran several scenarios around the back support
issues, the equalization and their goals
Round 1
Mid-point spousal support for maximum time and back support at mid-point
Katie returns to work after 1 year and education upgrade
Equalization to Tom of $90K less back child support owing of $14K and spousal support of $22K
Round 1
Katie stays in house until youngest child finishes school
Tom keeps pension and purchases a house using equalization payment for his down payment
Katie’s education expense from her RRSP under the Life Long Learning Plan
Round 1Outcome
Tom has some minor cash flow shortages in the first couple of years but is fine and does not ever run out of money
Katie is OK until age 69 then she runs out of money
First Scenario
First Scenario
Their Reaction
Katie was shocked that she would owe Tom money in equalization
Tom was shocked at the back support numbers
They both broke down…crying…
What next?
Remind them of their priorities and goals, short term and long term
Brain storm other options
Long and short of it
In our 15th scenario we were able to reach an agreement and it became the financial settlement
Here’s what it looked like…
Final Scenario – Net Worth
Final Scenario – Working Capital
What did this look like for each of them?
Pays spousal support for four more years at the mid-range for his salary
Child support as per guidelines
Forgoes equalization payment
Tom
No back support paid
Keeps his pension
Shares day care expenses proportionately to his income when Katie returns to work
Postpones buying a house until support payments are finished
Tom
RESP contributions set up proportionately to income
Tom
He never runs out of money
Katie
Child support and spousal support increases as per guidelines
She does not have to pay Tom an equalization payment
Keeps the house with the intention to sell when youngest leaves home
Takes money from her RRSP to pay for education
Katie
She never runs out of money
Conclusion
Tom and Katie reached an agreement on a settlement that they helped
orchestrate. It was based on their interests and needs.
They commented that our neutral voice helped them to reach a settlement that they both felt
comfortable with now and 25 years from now.
Conclusion
Thank you
For advisor use only
All charts and illustrations in this presentation are for illustrative purposes only. They are not intended to predict or project investment results. Assante Wealth Management’s advisory services are offered through Assante Financial Management Ltd., Assante Capital Management Ltd. and Assante Estate and Insurance Services Inc. Assante Estate and Insurance Services Inc. is owned by Assante Financial Management Ltd. and Assante Wealth Management (Canada) Ltd. ®The Assante symbol and Assante Wealth Management are registered trademarks of CI Investments Inc., used under licence.