Marriage is a social and economic union. When a marriage ends, the financial consequences can be just as far-reaching as the emotional ones. People who are considering or concerned about a split may not know what this means for them long-term.

No-fault divorce

Canada’s Divorce Act does not consider the reason for a divorce . It is primarily a no-fault system. While mental or physical cruelty or adultery can allow for a quicker divorce, in most cases the ground for divorce is a one-year separation where a couple has been living apart.

The financial outcome of a divorce does not hinge on the factors contributing to a divorce. So, proving that your spouse was cruel or cheated does not mean you are entitled to a larger share of assets or more support.

Some couples continue to live separately but in the same house following a divorce, particularly given the high cost of housing these days. Real estate tends to be the most valuable asset when a couple divides their assets.

Equalization of net family property

Net family property rules differ by province. Although the Divorce Act is a federal law, the processes and precedents for divorce are dictated by the provinces and territories.

Some places treat common-law couples the same as legally married couples. British Columbia, for example, has the same property division rules once a common-law couple has lived together for at least two years. By comparison, provinces such as Ontario do not, with common-law partners generally taking their assets with them when they split.

If a couple has accumulated most of their wealth together, it is more likely they will divide their assets equally. Otherwise, it may be the increase in net worth during marriage that is split. However, there may be other adjustments or exemptions, so family law advice is crucial.

Inheritances or gifts may be exempt, for example. But these often become co-mingled with other assets and debt repayment, making them more difficult to identify. Spousal support obligations may also result in adjustments to the division of assets.

Spousal and child support

Spousal support may be payable by one spouse to the other if there is an income differential, with the higher-income spouse paying the lower-income spouse. The duration of the payments is typically dependent on the length of the marriage.

Spousal support is tax deductible by the payor and taxable to the recipient. It is considered earned income for the receiving spouse for

registered retirement savings plan (RRSP) purposes, so the income inclusion can be partially offset by making contributions with the resulting RRSP room.

Spousal support may be predetermined as part of a separation agreement but can sometimes be subject to review over time as well. Some separating spouses decide to address spousal support through their asset division, with the lower-income spouse receiving a larger share of the family assets in lieu of future payments. In this lump-sum case, the notional spousal support is neither tax deductible to the payor nor taxable to the recipient.

Child support is payable if there are dependent children. This can include children who are over the age of majority but still attending post-secondary education, particularly those under 25. Child support is generally determined annually based on the separating spouses’ incomes, the number of children and how much time the children spend living with each parent.

Child support cannot be settled with a lump-sum payment and it is neither tax deductible nor taxable. It is an after-tax, tax-free payment.

Tax implications of transfers

Tax is an important consideration for asset division. A spouse who receives $100,000 of

tax-free savings account (TFSA) assets or principal residence equity is better off than one who receives $100,000 of tax-deferred RRSP or pension assets. The TFSA and principal residence assets have no deferred tax liabilities, whereas retirement and pension assets will be taxable in the future as income is paid. They may only be worth roughly 50 per cent to 80 per cent as much after tax as a result.

When spouses transfer assets between each other as part of their written separation agreement, these assets can be transferred on a tax-deferred basis if done correctly. This includes transfers between RRSPs or pensions as well as taxable capital assets such as non-registered investment accounts, cottages, rental properties or private company shares. Tax advice and proper documentation are crucial to avoid surprises.

Insurance and estate planning

Sometimes, a separation agreement will include a requirement for one or both spouses to maintain or obtain life insurance to cover future support obligations. A separation may also prompt you to consider changing a life insurance beneficiary to be your estate, children or other parties instead of your former spouse.

When you are suddenly single it can also increase risks in the event of a disability or other health issue. Your family income is lower post-split and the share of your income spent on your expenses tends to increase as a result. This means disability and critical illness insurance may become more important, so you should consider increasing or obtaining adequate coverage.

A relationship breakdown is a good time to revisit your estate planning as well. You may want to update your will with new executors or beneficiaries. Powers of attorney, personal directives and mandates that apply if you are incapacitated but still alive should also be updated. These province- or territory-specific documents appoint someone to manage your financial or health-care affairs if you are unable to make decisions on your own. Your spouse may no longer be the best choice.

Retirement and other financial implications

A single retiree typically needs to save more than each partner within a couple to fund retirement. As a result, a separation will require a reset on your

retirement plan . This can be a good opportunity to re-establish long-term goals, which may be different from those considered during a relationship.

One spouse tends to take the reins with a couple’s investments, so the end of a relationship may also mean a change of investment strategy. If a couple works with an adviser, one partner may decide to move their investments. If a couple is self-directed, the less savvy partner may not be comfortable managing their own investments after the split.

Moving forward

The lead-up, process and fallout from a divorce can be difficult emotionally and financially. But it is important to be informed about the implications if you are considering a break-up. Legal and financial advice can help you understand the numbers if you are heading toward an inevitable relationship breakdown.

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Significant planning is required after a divorce. Although it can be difficult, it is an important step toward financial security as a single person to move forward with confidence and success.

Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at jheath@objectivecfp.com.