It is wonderful to celebrate love! The beginnings of a new relationship, love’s fist bloom. These are blissful years. Whether it is a beautiful white gown and a black tuxedo, or a romantic destination wedding, the journey for a couple often begins with a wedding. According to Bank of Montreal InvestorLine study, the average cost of a wedding in Canada is $18,000. Add a honeymoon, and the average cost increases to over $30,000. Of that total cost, 60% is drawn on funds from investments and savings, 13% on the credit card, and the remainder a gift from friends and family. Given these statistics, it is not uncommon for newlyweds to begin their new life together in debt. Add student loans and a mortgage, and their debt can be substantial. According to the Calgary Real Estate Board, the average price for a detached single house was about $550,000 in 2017. If the couple has children, the cost of raising a child until the age of 18 is estimated to be $250,000 per child. According to StatsCan, the average family in Canada has 1.6 children. Moving forward to the age of retirement, in general, a working individual between the age of 55 and 64 will have retirement savings that amount to $500,000. Therefore, in the course of a marriage, an average married couple living in Calgary will have “invested” at least $1.5 million in their relationship. So, when it comes to uncoupling, there are multiple financial factors to consider, especially for those approaching retirement. A breakdown in a relationship is not only emotionally traumatic, but is also financially devastating to the couple and their families. Here are some essential tips to handle the speed bumps and avoid a breakdown in the relationship.
Prior to Cohabitation and or Pre-Marriage
Committing to a relationship is a life-changing event, and requires one to not only prepare their heart and mind for a relationship that is expected to be for a lifetime, but also to consider the impact the relationship will have on their finances. Whether married or common-law, you are now sharing financial resources and investments together. Finance is one of the leading causes that result in a breakdown of a relationship, and requires alignment with your significant other beforehand to ensure a successful long-term relationship. Prior to cohabitation, talk about how you and your partner are going to handle your money matters. What are the common financial goals and how are you working together to achieve them? Are you without judgement, and open about your finances? Whether one partner is a prudent spender and the other extravagant, consensuses on major financial goals are essential. Couples need to be aware of each other’s spending styles, and come to an alignment on savings and budgeting, and agree on goals for paying down debt, retirement savings, education savings, investments, and discretionary spending such as vacations. To manage your cash flow, decide on whether you want to have joint or individual bank accounts. Know what is jointly owned and what is not. For example, assets and liabilities accrued during the period of cohabitation are family property, while pre-cohabitation assets and liabilities belong to the individual, and only the capital gains during cohabitation is considered family property. Furthermore, legal awards (e.g. car accident settlement), inheritance, and third party gifts also belong to the individual, and are not family owned assets. If there is a prior settlement from a previous relationship, and you are entering into a new relationship, then having an honest financial conversation is crucial and provides clarity for the new couple. Premarital mediation is an option that allows the individual entering into another relationship to protect what needs to be protected, such as a defined benefit pension plan, or property that is bequeathed to offspring from a prior relationship.
In addition to financial matters, have an open discussion between you and your partner about career, children, and parenting. The American Sociological Society recently noted that college-educated women initiate approximately 70% of divorces. The reason is that they view heterosexual marriage as a gendered institution. Simply put, a wife’s career is constrained by her husband’s expectation that housework and childcare is fundamentally a women’s duty. Cultural influences and gender bias can strain a relationship with children because men are expected to be the breadwinner, which justify women to become responsible for childcare and housework. Consequently, women are more likely to want a divorce if their partner is not sensitive to their career aspirations and feel they are not contributing more to managing the household and raising the children. If family responsibilities are not equitable then separation and divorce is eminent.
During Cohabitation and Marriage
All long-term relationships have their challenges. If you can see that certain issues are starting to surface, then take the time immediately to set the course right before there is a breakdown. For example, a common issue related to finances, are financial decisions that satisfy one’s own needs without considering the impact it has on your relationship as a couple. Another common financial issue is not agreeing on how to manage individual debts incurred prior to cohabitation, such as student loans or business investments that incurred a major loss. Don’t ignore the white elephant in the room. Come to terms with the financial baggage, and address it with a plan of action to work it out. Some action items to consider:
- Make a budget;
- Review your debt, and agree on a repayment plan;
- Establish an emergency fund;
- Evaluate insurance coverage;
- Assess your retirement funding needs;
- Optimize your taxes;
- Request free credit reports;
- Start an education fund (if applicable);
- Plan for potential life changing events (marriage, divorce, death, and changes in financial circumstances).
For more information on how to manage debt, go to the following Government of Canada website: https://www.canada.ca/en/financial-consumer-agency/services/debt.html.
Separation and Divorce
If there is a breakdown in your relationship, and divorce is inevitable, then consider following financial impacts:
1) Distribution of the family property is a major part of the separation/divorce settlement, and includes:
Non-registered financial investments, such as owning shares in private or public companies, mutual funds, and real estate such as the family home or recreation property is generally divided using the adjusted cost base (ACB), and thus, no tax is triggered when an asset is transferred between spouses. This is often referred to as a rollover.
Registered Retirement Savings Plans (RRSP) has inherent tax implications. If you remove funds from your RRSP you will pay tax on the withdrawal and the amount will be added to your income in the year of the withdrawal. During separation and divorce, you can roll your RRSP’s to your ex-spouse during the equalization process without immediate taxation. If you are going to receive part of your settlement in the form of an RRSP roll over from your spouse, then it is important that you consider potential future tax implications.
Canada Pension Plan (CPP)
Canada Pension Plan (CPP) credits are a special category of property. If you have been the primary caregiver for your children and you and ex-spouse are separated, then call the CPP toll-free number 1-800-277-9914 to determine if you meet the basic requirements. If you do, then you can request CPP to divide the CPP credits you both earned while you were married equally. The Calgary Canada Pension Plan office also has pamphlets that tell you how to do this. CPP credit splitting means that the amount of CPP contributions (Credit) you both accumulated during cohabitation will be added together and split between the two of you. Either you or your ex-spouse can request the CPP credit split. Here is the link for more information: https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-split-credits.html.
Private Pension Plan
When dividing a private pension plan, such as the Special Forces Pension Plan, the non-member spouse can choose to transfer the commuted value of a defined-benefit (DB) plan or choose a lump sum from a defined-contribution (DC) plan to a RRSP. Pension funds that are locked in must be transferred into a locked-in RRSP that cannot be accessed until the person receiving the money retires.
2) Spousal support is determined on a case-by-case basis, and varies widely in amount and duration.
It can be time-limited:
- if the marriage was brief;
- there are no children;
- and both parties are capable of working and meeting their future needs.
- paid regularly, usually monthly;
- with tax consequences for both payor and recipient.
A lump-sum payment:
- a lump-sum payment has no tax consequences for either party;
- may be ordered if the marriage was brief;
- or when a quick and clean break is desirable, there is a degree of hardship to be relieved,
- or the payor-spouse has substantial assets, but will have to make only a minimal (and perhaps no) equalization payment.
In conclusion, understanding these family complexities may simplify the conflict in your relationship. All relationships encounter mountains and valleys. It requires effort and dedication. Prepare your mind for the finances, prepare your heart for the emotional issues, and evaluate your decisions carefully.
“When we are no longer able to change a situation, we are challenged to change ourselves.” “Everything can be taken from a man but one thing: the last of the human freedoms—to choose one’s attitude in any given set of circumstances, to choose one’s own way.” — Viktor E. Frankl