Navigating Your Finances During Divorce: A Primer

Ending a marriage through separation or divorce is often a stressful and uncertain process. The legal conversation is focused on an end point—signing a separation agreement. But its impact on your finances may continue well into the future.  

Your separation agreement covers property division, and any support payments (child or spousal) that apply in your situation. By understanding this important document and the areas it will likely include, you can help ensure the smoothest possible transition to your next chapter. Here’s what you should know. 

Separating Property: What to Know 

The financial discussions around separation can be split into two categories—dividing property, and support payments. When child or spousal support applies, your separation agreement will contain clauses about how much must be paid, for how long, and when and how to review amounts. 

The net family property statement is the basis for discussions about how to divide what you own and what you may owe or be owed. It’s important to start with an understanding that each person is legally entitled to an equal amount of the property accumulated in their marriage.   

If you plan to stay in your family home   

Do you want to keep the family home? It might be possible to do so while splitting your property equally. This entails placing the value of the home—minus any mortgage owing—on your side of the property statement while placing property of equal value (including shared RSPs, pensions, TFSAs, and non-registered accounts) on the other.   

The moment after the agreement is signed, you must be ready to make the payments associated with the home. These payments include your mortgage (if applicable), utilities, property taxes, and maintenance.   

If there’s a mortgage on the home, you’ll need to qualify for it on your own. Lenders look at income when approving mortgages, not net worth. They’ll only look at mortgage payments, property taxes, and heating costs as expenses to determine if you qualify. They’ll use your pre-tax income to assess whether you have enough income to make your mortgage payments. So, you’ll need to afford those payments on your after-tax income.   

Spousal and Child Support 

Spousal and child support can have a significant impact on your finances, whether you’re providing or receiving it.  

If you’ll be paying support 

Here are a few things to keep in mind if you’ll be a support payer. 

• Plan to make payment amounts available – Child support is reviewed annually, and payments are related to your previous year’s income. If your have a year where you receive sizeable bonuses or commissions, set money aside to anticipate an increase in child support. 
  
• Understand timelines - If you’re paying spousal support, make sure you understand if and when reviews happen. Regular spousal support payments are tax deductible for the payor; when payments stop, your income tax situation will also change. Make sure you understand the information the CRA needs to include your spousal support payments as a deduction. 

If you’ll be receiving support 

Here’s what to know if you’ll be the recipient of spousal or child support.  

• Understand review times - Be aware of when child support will be reviewed, and when spousal support will be reviewed if applicable.  
  
• Look at your own expenses - How much does child support cover? If your former partner has variable income and experiences a lower income year, how will you be affected? Can you set aside part of your payments during years when they’re higher to help during lower-payment years?  
• Child support payments have a natural end - Look ahead to see how this will impact your household and finances. Are there obvious changes you’ll need to make? 
• Spousal support is taxable income - You’ll need to set aside money to cover the taxes. Make sure you understand what your agreement says about how long spousal support will last. 

Whether you’re paying or receiving child support, it’s important to understand tax credits. The eligible dependent credit is one of the larger tax credits available, and the one that’s most often filed incorrectly.  

Meeting with a CFP^® professional or QAFP^® professional while drafting your agreement can be helpful. This document should include language stating that you need to maximize the credits that each parent is able to claim. 

Other Considerations 

There are a few other things to consider as you navigate separation and its impacts on your finances. To start with, take a look at your financial milestones as parents.  

What does your agreement say about education costs? How should they be divided between you, and what does that mean for you as you think about saving for postsecondary programs? If your agreement doesn’t touch on this area, you’ll need to discuss it at some point with your former partner. From there, look at your own situation to decide what’s possible for you. 

You’ll also want to think about Canada Pension Plan (CPP) contributions. If you and your former spouse or common-law partner made any during the time you lived together, they can be equally divided after a separation or divorce. This is called credit splitting. The rules around credit splitting vary by province. Make sure you have the information you need to negotiate your agreement and properly plan your CPP amount in retirement. 

Your separation agreement represents more than just a moment in time. It’s an important financial document that can significantly shape your finances moving forward. When you negotiate with both a present and future understanding, you’ll be in a stronger position to make financial decisions. 

To find a CFP professional or QAFP professional who can help you navigate your finances during a separation or divorce, use the Find Your Planner tool.    

Sara McCullough, CFP, is the Owner at WD Development, which offers advice-only financial planning