In our 20s it seemed that all our friends were getting married. We used to save their wedding announcements in a drawer, and occasionally I would look through these mementos of that happy moment in each couple's lives. All of them were at the most strikingly attractive time in their adult lives - which I suppose is how they managed to get someone to marry them.
It was sad when the first of them dropped off the list of the happily married. And sadder still when others followed after raising families together, but just grew apart, or worse, became sources of venom in each other's lives.
Try as we may to stack the odds in our favour by finding someone whose puzzle piece seemed to complete our calico life, the truth is, there is an element of risk in a 60-plus year program that marriage is intended to be.
Sometimes life, not death, does us part
Marriage breakdown can affect both your income and your assets (usually negatively) and has a number of legal, tax and estate planning implications, which we touch on here. Note that for tax purposes, both married and common-law spouses are considered to be separated if they have been living separate and apart for at least 90 days as a result of a breakdown in the relationship and have not reconciled during this time.
Spousal support payments
Spousal support payments are taxable to the recipient and deductible to the payer provided they meet certain conditions, including that the payments are periodic (as opposed to lump-sum) and are made pursuant to a court order or agreement.
Child support payments
Generally, child support payments are neither taxable to the recipient nor deductible to the payer. An exception applies for orders or agreements made prior to May 1, 1997, (where the tax treatment is generally the same as spousal support payments, unless the former spouses jointly elect to be subject to the current child support rules).
Lump-sum payments
Lump-sum child support or spousal support payments are neither taxable to the recipient nor deductible to the payer. If the lump-sum payment is for periodic child support payments made pursuant to a court order or agreement before May 1, 1997 or periodic spousal support payments that have fallen into arrears, the payment may be taxable to both.
CPP/QPP splitting
CPP/QPP benefits may be split between former spouses if certain conditions are met. In general, only the benefits accumulated during the time you were married or lived together can be divided.
Transfer of capital property
Property may be transferred to a former spouse at the adjusted cost base if the transfer is in settlement of marital property rights. The former spouses may elect that the transfer be at fair market value, which would trigger capital gains or losses.
Transfer of RRSP and RRIF
Funds in a RRSP or RRIF may be transferred on a tax-deferred, rollover basis to a former spouse's RRSP or RRIF if certain conditions are met. In general, the transfer of funds to the former spouse's RRSP or RRIF must be done pursuant to a court order or written separation agreement relating to a division of property in settlement agreement. These rules also apply to locked-in RRSP assets.
Attribution rules
The attribution rules on income earned on property transferred to a former spouse cease to apply subsequent to a marriage breakdown. Attribution will not apply to capital gains arising from the disposition of transferred property to a former spouse if both former spouses jointly elect to not have the attribution rule apply.
Childcare expenses
Separated or divorced spouses who have shared custody of a child may only claim a deduction for childcare expenses incurred while that child resided with them.
Tuition credit
Where spouses are separated or divorced, a child can only transfer the unused portion of his or her tuition credit to one parent, provided the other rules are met. The former spouses and the child will have to agree as to how the credit will be transferred.
Eligible dependant credit
Only one spouse can claim an eligible dependant credit for a particular dependant, even if both spouses are eligible to claim this amount.
Legal fees deductibility
Legal fees incurred to establish the right to support payments, to obtain an increase in support, to collect late support payments or to make child support non-taxable are deductible. From the payer's standpoint, legal fees incurred in negotiating or contesting an application for support payments or for the purposes of terminating or reducing the amount of support payments are not deductible. Legal expenses relating to custody of or visitation rights to children are also not deductible.
Note that a divorce does not invalidate a will. You should hear ominous movie music here, the sort that warms of impending doom. It is crucial to review your will upon a marriage breakdown to ensure it still reflects your intentions and estate planning objectives - it usually doesn't. You must also review your beneficiary designations on registered plans and insurance policies as well as your powers of attorney.
Mark Ryan is an investment advisor with RBC Dominion Securities Inc. (Member-Canadian Investor Protection Fund), and these are Ryan's views, and not those of RBC Dominion Securities. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Ryan can be reached at mark.ryan@rbc.com.
