Kevin Greenard: Financial considerations when ending a marriage: After the separation agreement

Third in a four-part series

This article assumes that couples whose relationship has already either come to a written agreement on financial matters or, if they could not come to an agreement, have obtained an order from either the Supreme Court or Provincial Court of B.C. Both the Provincial Court and the Supreme Court can make orders about child and spousal support. Only the Supreme Court can make orders about property division and divorce.

Common-law couples that qualify as spouses under the Family Law Act are subject to the same laws as married couples and may require a separation agreement and/or a court order. The only thing that common-law couples don’t require is a divorce order. Once you and your partner have signed a separation agreement, you may also choose to file it with the court.

Whether you were married or in a common-law relationship, the financial finality of the relationship is normally outlined in one of these documents. Ask your Portfolio Manager to review your draft separation agreement before you sign it. We also play a role in its execution after it is signed.

The following are the typical issues we discuss after it is signed:

Fully executed separation agreement

We will nearly always require a final copy of the separation agreement signed by both parties. One part of such agreements typically outlines the division of assets, including financial assets.

Clients are informed that we will have at least two, possibly three, meetings within a couple of months to ensure that all clauses of the agreement are implemented. One meeting is typically required to provide options to divide up the registered accounts, including the Registered Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA).

At the same time, we map out a proposal of how to deal with the non-registered account if flexibility is given in the agreement to move cash or investments in-kind. Typically each ex-spouse will open an individual account and the non-registered investments are split as per the terms of the separation agreement.

They are not always split 50-50, as the non-registered account can be used for any equalization payment. An equalization payment is meant to put both you and your ex in an equal financial position factoring in all of your joint assets and debts.

For example, if one person receives the house, then the other may receive more or all of the investment accounts.

A second meeting is done after the division is completed to update the investment objectives, risk tolerance, and Investment Policy Statement.

A third meeting can be done to cover other items such as an application for insurance, updating the financial plan, adjustments to the portfolio if investments were transferred in-kind or to review options if starting with cash.

Equalization or adjustments to RRSP and RRIF accounts

Often registered accounts are either evenly split or the division is outlined in the separation agreement. This division is done using CRA form T2220 — Transfer from an RRSP or RRIF to Another RRSP or RRIF on Breakdown of Marriage or Common-law Partnership.

When I review a draft separation agreement I typically want to make sure that flexibility is possible. By flexibility I mean that the division can take place either in cash or in-kind (as is — nothing is sold). The quality of the investments, and if any charges will be incurred, are two factors that we consider.

An example of charges is redemption charges from fund companies, or commissions charged by a wealth adviser. In the majority of cases I will process T2220 transfers in-kind to be safe, provided the separation agreement permits it. This involves attaching a schedule with the T2220.

Take, for example an RRSP account that is to be split evenly. Currently in the account is $20,000 in cash, 100 shares of Apple, 200 shares of Microsoft, and 180 shares of Nestle. In this example, I would assist the client in preparing the schedule which would specifically list the assets: $10,000 cash, 50 shares of Apple, 100 shares of Microsoft, and 90 shares of Nestle.

After the transfer is done into a fee-based account, all adjustments can be made without commission charges.

On the T2200 the transferee is the person receiving either the cash or investments in-kind. The transferor is the person who is required to send the cash or investments in-kind. If we are assisting the transferee, and the client does not have an RRSP or RRIF account, then we must open up a new account.

If we are not assisting the transferor as well, then we will communicate with the wealth adviser or portfolio manager who is assisting the transferor and provide our recommendations for the transfer and the details (i.e. issuer, plan/account number, and address).

Once the division is agreed upon, both the transferee and transferor need to sign the T2200. The signed separation agreement, or court order, and the signed T2200 will enable the transfer to occur on a tax-deferred basis.

The transferor is not taxed on the amounts transferred out of the account, and the transferee is not taxed on the amounts received. When the transferee withdrawals the funds in the future, however, it will be taxable in the hands of the transferee.

At times, we see separation agreements that will state a dollar amount versus a percentage for the transfer.

Let’s use as an example an individual who has an RRSP valued at $500,000 on the most recent statement. One might think that if the separation agreement states $250,000 or 50 per cent that the two options are equal — but they are not.

If our client is the transferor, I would normally recommend my client to put a specific dollar amount in the separation agreement. If our client is the transferee, I would almost always recommend to my client to put a percentage, in this case 50 percent.

The reason for this is that the $500,000 normally has a high probability of increasing before the transfer occurs. If this occurs then you would participate in the increase.

For example, if the RRSP increases to $540,000 prior to the paperwork being completed then the amount divided would be $270,000 (higher by $20,000). Of course, the investment account could go down in value, and you could get less.

If the separation agreement says that the investments are to be liquidated then it doesn’t matter as much.

Assuming the separation agreement gives flexibility to transfer the investments in-kind (as is) we would factor in several things when looking at the account(s), including: redemption fees, level of the markets, quality of the investments, commissions (if any), and whether the investments are generating income.

If you do state a dollar amount and are receiving the transfer, we recommend doing the transfer as soon as possible so you can receive the investments and get it invested.

Equalization or adjustments to TFSA accounts

One paragraph that we encourage our clients to put into a separation agreement relates to the division of TFSA accounts.

We are permitted to transfer funds from one spouse’s TFSA account to another spouse’s TFSA account directly, provided it is done correctly. The TFSA accounts do not have to be split 50-50 and can be a flexible tool as part of an equalization calculation.

Internally, financial institutions will have their own form that they use rather than a specific CRA form.

Similar to the RRSP transfer above, the transferee is the individual receiving the TFSA. The transferor is the party who is delivering or sending the TFSA. For example, the separation agreement could state that as part of the equalization payment, one party (the transferor) will transfer either all, or partial of a TFSA to the transferee.

Typically, we have both the transferee and the transferor sign our internal form. In rare cases when we are unable to obtain one of the signatures, we can attach a copy of the separation agreement or court order to facilitate the transfer.

It is important to ensure that your lawyer puts the appropriate paragraphs in the separation agreement to ensure that any transfers of TFSA property does not impact the Transferee’s or Transferor’s TFSA contribution room.

Removal of spousal designation

When there is a discrepancy in income levels, often a lower income spouse may have opened a spousal RRSP. With a spousal RRSP, the higher income spouse contributes to the spousal RRSP to receive the tax deduction, but the money would be in the name of the lower income spouse.

Many people may think that once a spousal RRSP, always a spousal RRSP — but this is not true. After October 2003 Canada Revenue Agency changed the rules and in the case of marriage breakdown it may be possible to change the designation provided no contributions or withdrawals were made in the current year.

Once we have a copy of the separation agreement, we can assist our clients with the documentation needed to have the spousal designation removed.

Updating beneficiaries

One of the steps I immediately take with clients who have separated is to see if an update to their designated beneficiaries on all registered plans are warranted, including Registered Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA).

Before you go into see your financial professional, you should give some thought as to who you would like to name. It is possible to name your estate. If you do this, then it is even more important to update your legal documents.

Updating estate planning documents

Typically the family law lawyer that assisted you with your divorce is not the same lawyer that will assist you with updating your estate planning documents. Some of the estate planning documents that may need updating are your will, powers of attorney and representation agreement.

I always recommend our clients review all these documents with a wills and estates lawyer after separation. If you are dealing with a larger firm then chances are they will have lawyers with expertise in this, and staff that can assist you with updating your estate planning documents.

Sometimes clients will put their spouse as power of attorney on bank or financial accounts. We recommend that you reassess this and fill out the required paperwork to formally revoke your spouse’s power of attorney on all accounts.

Make sure your spouse is paying life insurance

When support obligations are extended out multiple years, then some lawyers will request that the spouse required to pay support payments also take out a life insurance policy on their own life.

For example, if a spouse is required to pay $2,500/month for the next ten years, then a clause in the separation agreement could require the payor of support to have term-10 policy for $300,000, with the receiver being the beneficiary.

In addition to the mandatory insurance required in the separation agreement, you should also look at other personally owned life insurance and determine if beneficiary changes are necessary.

Change the investment objectives

In reflecting over a couple of decades of advice given to individuals who have gone through a divorce, I realize that one of the most important pieces of advice I’ve given to clients is to not stay out of the housing market.

One of the best tax free investments in Canada is your principal residence. Often, taking this step toward purchasing a home involves a dramatic shift to your investment objectives. Your time horizon shrinks and raising cash to apply against real estate purchases may become your new objective.

Creating a financial plan

The starting point to a discussion about becoming financially independent and mapping out the road ahead becomes clearer after the separation agreement is signed or the court has made an order. At that point you have a clearer understanding of your current situation.

After every life event, including separation, it is necessary to update the financial plan. The plan also factors in whether you are obligated to pay support payments or receive support.

In some cases, we need to map out a systematic withdrawal plan (SWIP) to assist with your cash flows. This can be shorter term or longer term, depending on the circumstances.

Capital property and transfer of title

Most forms of capital property can be transferred at the adjusted cost base (ACB) so that the receiving spouse can use the ACB of the property and there is no tax exposure on the transfer.

It is important to have all those details for your files, especially for assets that could have future tax exposure. This would normally have been obtained in the negotiation process before the separation agreement was signed.

For example, a rental or vacation property that is transferred into one person’s name could have an ACB (original cost) of $200,000 and a current market value of $1,000,000. Unless the separation agreement states otherwise, the $800,000 unrealized gain will roll over 100 per cent to the spouse receiving the property.

It is possible for the transferor of property to unilaterally opt out of the roll over provisions. We recommend that if you have capital property with significant unrealized gains that you speak with a lawyer that has expertise in this area to outline your options. The same applies to non-registered investment accounts with significant unrealized capital gains. The separation agreement should have factored in the future taxes that will be payable on any taxable unrealized gains.

After the separation agreement is signed or the court has made an order, then typically there are discharges from mortgages and debts to sort out. One spouse may have to transfer title of a property to another.

For example, if one person is buying out the ex’s portion of the principal residence then this has a few steps that need to be facilitated primarily by lawyers and bankers. The conveyancing lawyer that does this type of work is likely not the family law and divorce lawyer that assisted you with your separation agreement or obtaining a court order.

If you are at a larger law firm, the family law lawyer may have a colleague that can assist with any property transfer outlined in the separation agreement. Often this involves the individual purchasing the home to provide funds to the lawyer to hold in trust for this transaction.

At this stage, your lawyer could be working with your bank to discharge or register names on mortgages. The discharge of the old mortgage or registration of the new mortgage and registration occurs concurrent with the transfer of title.

Typically, once Schedule A, Form A is signed by the individual then the trust funds are released to the other party giving up ownership. The final step is for your lawyer to follow up with the land titles authority to ensure the transfer of title is fully completed.

Recipient of child or spousal support

If, in a separation agreement or court order, we note that our client is the recipient of child or spousal support, we will make them aware that legal fees paid relating to child or spousal support are a tax deduction.

We encourage our clients to request receipts from the law firm. If you are a payer of child or spousal support then you are not permitted to deduct legal fees.

Canada Pension Plan

A separation agreement typically calls for the splitting of Canada Pension Plan (CPP) credits that you and your former spouse/common-law partner contributed when living together. Even if the separation agreement does not address the CPP credits, it typically does not prevent a credit split.

The exception to this in British Columbia (and some other provinces) is if the separation agreement states that you have both agreed not to split CPP pension credits. The form required for CPP splitting is ISP-1901.

You may request a copy of this form from Service Canada or by searching online. If you search ISP-1901A you will find a checklist of information and documents you need. They will need the obvious personal information, including social insurance numbers. They will need the date of marriage and the date your marriage ended.

With both marriages and common-law relationships the period of living together is normally in the recitals of the separation agreement. If you were living in a common-law relationship then you must apply in writing, with the appropriate documents within 48 months of the date you began living apart.

Pensions

The paragraphs in a separation agreement relating to registered pension plans are very important. If either or both of you have pensions, then the separation agreement should have clauses that deal with the division of all pensions.

If you are entitled to a portion of your ex’s pension then you may have to fill out specific forms to register your future entitlement. Often, this is referred to as becoming a “limited member.”

Although there is often a fee to register your entitlement to a pension it is an important step for to complete either by yourself or with your lawyer. Once this is registered, you will automatically receive a copy of the member’s benefit statement each year before you begin collecting the pension.

Reminder to update your mailing address

We recommend to our clients that they contact CRA and all the professionals they work with to ensure those bodies have your correct mailing address. If a house is registered only in your name and title is transferred from your spouse, then you will want to phone the municipality to update names on accounts for utility bills and mailings.

All your financial obligations should have up to date information (i.e. new phone number, address, one name on the account versus two). If you have changed credit cards or bank accounts then any automatic payments should be adjusted accordingly.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138. greenardgroup.com