A breakdown in a relationship is emotionally traumatic and financially devastating. Here are some tips on how to avoid common pitfalls when cohabiting.

 

Whether it is a beautiful white gown and a black tuxedo in a local church, or a romantic destination wedding, the journey for a married couple begins with a wedding. According to a 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. Another 13% on the credit card. The rest in the form of gifts from friends and family.

Given these statistics, it is not uncommon for newlyweds to begin their 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 in Calgary was $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. Moving forward to retirement, a working individual between the age of 55 and 64 will have retirement savings that amount to $500,000 on average. 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 couples approaching retirement. A breakdown in a relationship is not only emotionally traumatic, but it is also financially devastating. Here are some tips on how to avoid common pitfalls when cohabiting and prevent a breakdown in the relationship.

 

Prior to Cohabitation

Committing to a relationship is a life-changing event. It requires one to prepare their heart and mind for a relationship that is expected to be for a lifetime. It also requires one to consider the impact it will have on their finances.

Financial Matters

Whether married or common-law, you are now sharing financial resources and investments together. Finances is one of the leading causes of a breakdown in a relationship. Therefore, you and your partner need to be aligned on finances before cohabitation to help 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? How are you working together to achieve them? Are you open about your finances and without judgement? Whether one partner is a prudent spender and the other extravagant, consensus on major financial goals are essential.

Couples need to be aware of each other’s spending styles, and be aligned on saving and budgeting expenses. They need to 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 assets and loans are jointly owned and what are not. Assets and liabilities accrued during the period of cohabitation are family property. Assets and liabilities acquired prior to cohabitation belong to the individual. Only the capital gains accrued during cohabitation is considered family property. Furthermore, legal awards, such as a car accident settlement, inheritance, and third party gifts also belong to the individual and are not family owned assets.

If there is a settlement from a previous relationship, and you are entering into a new relationship, then having an honest financial conversation is crucial. Premarital mediation is an option that allows the individual entering into another relationship to protect what needs to be protected, such as a pension plan, or property that is bequeathed to offspring from a prior relationship.

Cultural influences, gender bias, and other matters

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. This is because they view heterosexual marriage as a gendered institution. In other words, 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 and women are 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 are not contributing enough to managing the household and raising the children. If family responsibilities are not equitable then separation and divorce is more likely.

 

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 financial issue is 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. 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:

1. Make a budget;
2. Review your debt, and agree on a repayment plan;
3. Establish an emergency fund;
4. Evaluate insurance coverage;
5. Assess your retirement funding needs;
6. Optimize your taxes;
7. Request free credit reports;
8. Start an education fund (if applicable);
9. 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.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:

After-tax assets:

Non-registered financial investments, such as shares in private or public companies, mutual funds, and real estate, is generally divided using the adjusted cost base (ACB). Therefore, no tax is triggered when an asset is transferred between spouses. This is often referred to as a rollover.

Pre-tax assets:

Registered Retirement Savings Plans (RRSP) has inherent tax implications. If you withdraw funds from your RRSP you will pay tax on the amount withdrawn.It will be added to your income in the year it was withdrawn. During separation and divorce, you can roll your RRSP’s over to your ex-spouse during the equalization process without immediate taxation. In such instances, it is important that you consider 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 you may be eligible to divide equally the CPP credits you both earned while you were married. Call the CPP toll-free number 1-800-277-9914 to determine if you meet the basic requirements.

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 to split the CPP credits.

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, the non-member spouse can choose to transfer the the value they have agreed to to a RRSP in their name to avoid paying any immediate tax. Pension funds that are locked-in must be transferred into a locked-in retirement account (LIRA), which 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;
• both parties are capable of working and meeting their future needs.

Periodic:

• paid regularly, usually monthly;
• with tax consequences for both payer and recipient.

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, or there is a degree of hardship to be relieved,
• or the paying 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. Marriage requires effort and dedication. Prepare your mind for the financial issues. Prepare your heart for the emotional issues. 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