Divorce is a significant life event that carries both emotional and financial implications, so it’s crucial to approach this process thoughtfully and well-prepared. This article explores divorce financial planning and provides insights into key considerations for a smoother transition post-divorce.
We’ll delve into the essential aspects of divorce financial planning, including key considerations, a helpful checklist, and strategies to secure your financial future post-divorce.
Key take-aways
- It’s important to plan financially for a divorce to determine the financial impact to you and your spouse, minimize stress, and secure your financial future.
- It’s often best to seek professional guidance, either from a Certified Divorce Financial Analyst (CDFA) or a lawyer. They can help you save time, reduce stress, and ensure you make well-informed financial decisions.
- There are a number of steps that can help you prepare for divorce proceedings and life after divorce, including conducting a financial inventory, discussing major items with your spouse, making a plan to improve your credit, and updating your will. Download our free checklist for step-by-step guidance.
Divorce in Canada
Divorce rates in Canada have been steadily declining over the last 50 years. In fact, the number of divorces in 2020 was the lowest in Canada since 1973. It’s believed that COVID-19, and the public health measures that slowed many court processes, was a primary contributor to this recent sharp decline.
However, divorce statistics only tell part of the story of relationship trends in Canada. Divorce is a legal process that ends a marriage, so divorce statistics don’t cover separations of married couples or common-law relationships.
Despite the country’s declining divorce rates, Statistics Canada reports that there were still 42,933 divorces in Canada in 2020, so it’s important to understand how and what to prepare for, in the event you face this situation.
What is divorce financial planning?
Divorce financial planning involves preparing your finances for the potential impact of a divorce. By planning ahead, you can minimize any financial stress and protect your assets, to help make sure you and your loved ones have a stable future.
One of the main benefits of divorce financial planning is the ability to anticipate and address potential challenges before they become overwhelming.
What if I have a marriage contract or ‘prenup’ in place?
Some couples have marriage contracts or prenuptial agreements (‘prenups’) in place that dictate their respective rights if they divorce or separate. These are personal agreements and can even include things such as child custody or access to children.
Prenup agreements are typically created before marriage, and they can help avoid court proceedings and reduce the financial and emotional toll on a couple if the relationship ends. Since a prenup is a legal document, it’s best to consult with a professional if you have one, to make sure it’s followed during the divorce proceedings.
Divorce financial planning checklist
There are many different aspects of financial planning for a divorce. We created a step-by-step checklist to help you keep track of the key items to prepare for.
You can download the checklist here.
Continue reading for more information on each aspect of the financial planning checklist.
Seeking professional guidance for divorce
In Canada, you can consult with a financial planner or advisor, such as a Certified Divorce Financial Analyst (CDFA), to help you through the financial planning process for divorce. There are five benefits of consulting with a CDFA or other professional:
- Time savings: Divorce takes about a year on average in Canada, and CDFAs can help you understand financial considerations early, so you save time and make informed choices.
- Financial clarity: They can help provide a clear view of your financial future, making sure your settlement matches your needs. This can prevent costly back-and-forth legal battles.
- Long-term planning: They can also help forecast the effects of a settlement, including the impact to taxes and retirement, preventing future financial troubles.
- Budgeting help: CDFAs can assist in creating realistic post-divorce budgets.
- Reduced Stress: Lastly, they can help reduce stress by explaining the process step-by-step.
Consulting a professional can help you navigate a divorce wisely and secure your financial well-being. You can find a CDFA in your area here.
Update your will
We recommend reviewing and updating your will every 6-12 months, or when any big life events occur, including a divorce or separation. By having an up-to-date will, you can make sure that your wishes are accurately reflected in your will based on your relationship or marital status.
Note: There are some common misconceptions about how estates are distributed based on marital status, so read more about how marital status can impact your will here.
Once you’re ready to update your will, use a platform like Willful to do it easily, anytime.
Inventory your finances
An important part of the financial planning process is to create a detailed list of your assets, debts, income sources, and expenses. This inventory will be used as a foundation for negotiating a fair settlement in the divorce proceedings.
Property and asset division
Depending on your situation, dividing property and assets can be complex. So in addition to an inventory of your finances, you should create an inventory of properties and other large or sentimental assets. We recommend seeking professional advice to make sure you adequately plan for this aspect of the divorce.
Spousal support and child support
During the financial planning process, make sure that you understand the factors that are used to calculate how much spousal support (alimony) and/or child support will be paid or received.
In general, these calculations consider income, number of children, custody arrangements, and other factors.
You can use the Canadian Child Support Table Look-Up to help determine child support payments.
Calculating spousal support is one of the most complex areas of Family Law in Canada. You can reference the Government of Canada’s spousal support fact sheet to learn more.
These resources will give you a general idea of how much you might pay or receive in child and/or spousal support.
Tax consequences
Be aware of the tax implications of divorce, including capital gains taxes and changes in filing status.
Navigating divorce settlements
In addition to proactive financial planning, there are a number of other considerations to be aware of once divorce proceedings begin.
Marital property and assets
Each province and territory is responsible for the laws that determine the division of property in divorce or separation, so it’s important to review the rules for your specific area.
In general, the law considers the term ‘property’ to include a variety of items, including:
- your home
- furniture and other contents of your home
- other real estate
- pensions from employment
- Canada or Quebec Pension Plan credits
- RRSPs
- Investments
- bank accounts
- cash
- pets
This property is all subject to review and negotiation in divorce proceedings, so it’s important to be prepared.
Retirement accounts
Retirement accounts, such as pensions and RRSPs, will be carefully assessed and allocated during divorce proceedings. By consulting with a professional, you can make sure that any tax implications are considered and your long-term financial goals can be achieved.
Custody of minor children post-divorce
In addition to spousal and child support payments, the custody of any minor children will also be determined in divorce proceedings. The custody arrangement is one factor that will influence child support payments.
Either or both spouses, or any other person, can apply for custody of a child under the Canadian Divorce Act. Legislation defining ‘custody’ and ‘access’ to children varies by province, however.
To read more, visit the Canadian Government's report on custody, access, and child support here.
Custody of pets post-divorce or separation
In recent years, there has also been a reported increase in pet custody court cases. CTV News reported that Canadian animal rights lawyer, Rebeka Breder, has seen her caseload “almost doubled in the last couple years”.
“It's a really intense emotional fight, just like fighting over kids. And I would say maybe even more sometimes,” Breder said.
In part, pet custody cases can be difficult because Canadian law is open to interpretation, and the judge may consider a number of factors when determining custody. Guardianship of pets is not evaluated the same as children, because animals are considered property in Canadian law.
Preparing for your financial future
Once you’ve evaluated your current financial situation, you should begin planning for your financial future post-divorce. Keep reading for tips on investing in your financial future.
Dealing with a spouse’s debt post-divorce
You may be wondering if you could be held liable for any debt your spouse has after you divorce.
In general, you will not be liable for paying any debt that your spouse acquired before you were married. For example, if your spouse acquired student loans before marriage, it is their obligation to pay them post-divorce.
However, if your spouse acquired debt during the marriage, family law courts in Canada could treat that debt as joint debt–unless you made a previous legal agreement to divide the debt differently.
When dividing debts, the courts will consider factors like a spouse’s ability to pay and how the debt was incurred, and they could choose to divide the debt unequally.
Dealing with shared debt post-divorce
It’s common for spouses to have shared debts, such as a mortgage, car loans, or joint credit cards.
If possible, it’s best to address any shared debts with your spouse by discussing repayment plans and strategies to pay them off or divide them. This open communication can prevent financial complications down the road.
However, it’s not always possible to have this open dialogue with a spouse, and even if you come to an agreement, a judge may choose to divide the debts differently if your divorce goes to litigation. Since the division of debt can get complex, it’s best to seek advice from a professional when planning for the future.
Rebuilding your credit post-divorce
It’s likely that your credit score will be negatively affected when you get divorced, because of closing joint credit accounts or applying and opening new ones. Therefore, it’s important to take proactive steps to rebuild it.
You can start by paying bills on-time and reducing outstanding debts. Responsible credit management can positively impact your financial future.
Estate planning post-divorce
Updating your estate planning documents is crucial after a divorce. Many couples assign their spouse to important roles in their estate plan when married, such as an executor, a power of attorney, or a beneficiary. If you no longer want your spouse to be assigned to these roles post-divorce, you should update your estate plan to protect your assets and make sure your loved ones are protected according to your wishes.
People also ask
Do I need a lawyer to get divorced in Canada?
Although not necessary, it’s recommended that you seek legal advice and support when getting divorced. Family law is complicated, and you need to understand both the laws that apply and the court procedures in your province.
If you can’t afford a lawyer, your province may have family justice services available, such as mediation, that can help you through the process before you go to court. You can learn more about divorce and the resources available in Canada here.
How can I protect my money from divorce in Canada?
To safeguard your financial interests, engage in proactive divorce financial planning. Consulting professionals and updating legal and estate planning documents can help protect your assets.
How does a divorce settlement work?
You need to apply to a court to get a divorce in Canada, and in Canada there is no-fault divorce, which means the only ground for a divorce in the Divorce Act is marriage breakdown. You can read more here about the criteria for divorce in Canada here.
Once the necessary forms have been submitted to the court, the divorce proceedings will begin. In general, it’s best that you and your spouse agree on major issues like child support, custody, and property division together, rather than letting the court decide. If you cannot agree, the divorce will be settled in court, but it will likely be much more expensive and stressful to all involved.
Can I pay or receive both child support and spousal support at the same time?
Yes, in many cases people will pay both child and spousal support at the same time, however the Divorce Act prioritizes the payment of child support. To read more about child and spousal support, visit the Government of Canada fact sheet here.
In conclusion, divorce financial planning is a crucial step to help secure your financial future post-divorce. By following the comprehensive checklist, understanding the complexities of divorce settlements, and making informed financial decisions, you can embark on a new chapter with confidence.
Remember, seeking professional guidance and utilizing tools like Willful can streamline the process and help you navigate the complexities of divorce financial planning in Canada. Start by creating or updating your will to make sure your estate plan is in order.
