Divorce and Taxes. What You Need to Know to Move Forward
Guest Post: By Faisal Karmali
If you are going through a divorce, you have a lot to think about.
How do I find the right lawyer? How do I make sure my children are okay? Who will get the house? How will I pay my bills on a single income?
Tax is probably the last thing on your mind.
However, tax can make a painful divorce even more complicated.
Before you start fighting over who gets what, get the tax advice you need. Otherwise, you may end up giving more money away to the CRA than you have to.
And when the assets are divided, and the papers are signed, you will find that your tax situation is not the same as when you were married.
So how do you move forward?
Building a Tax Strategy After Divorce
Taxes are typically the biggest lifetime expense for most Canadians, and while paying taxes is unavoidable, there are strategic ways to minimize what you pay to the CRA. It just takes some planning.
Whether you are married, divorced, or single, tax planning should not be done on a year-by-year basis. You need a long-term strategy for what you can do to reduce taxes both now and in the future.
I often say that you pay taxes at three points in time:
- when you make money
- when you take money
- and, when you die.
There are many different strategies available to Canadians to minimize taxes at each of these points in time, and each individual or family will need to find the option that works for them.
But here is the bad news: many of these options are designed to benefit couples more than they benefit single individuals.
For example, married couples have the option to split income between the two of them to minimize their taxes. If the wife is making more money or has more assets in her name, there are strategies that will move some of the tax liability to her husband, reducing the overall tax bill for the family. If you have gone through a divorce and are now single, you do not have this option.
Having a strategy to minimize the money you pay to the CRA is especially important in retirement when you no longer have a regular pay cheque coming in. Most retirees have different ‘levers’ of income, which can include the Canadian Pension Plan (CPP), Old Age Security (OAS), corporate or government pension plans, non-registered accounts, or registered accounts like RRSPs, RRIFs, and TFSAs. When it comes to tax, each of these levers is treated differently.
One of the things I do when working with clients is to figure out the most optimal way to take out money, or the best sequence of withdrawals. For solo retirees, getting the sequence of withdrawals right is especially important as they do not have some of the other options that married couples do to reduce tax.
Transitioning assets as part of your estate can also be more challenging for single individuals. Couples can defer tax by rolling assets to the surviving spouse tax-free. When a single person passes away, he or she will have tax liability right away. Moving assets, such as the family cabin to your children will typically trigger a large tax bill - the last thing you want is for your kids to have to sell the cabin just to pay the estate tax.
After your divorce, sit down with your tax professional to address these issues as part of an overarching tax strategy. If the traditional options are not giving you the solutions you need, it may be time to look at alternative strategies like life insurance, for example.
Many Canadians view insurance as something to have ‘just in case’. Just in case you get into a car accident or just in case extreme weather damages your home. However, with the right strategy, life insurance can function like an investment to help you minimize taxes during your lifetime and after you are gone.
Let’s look at an example:
John is recently divorced and about five years away from retirement. He has enough saved to live comfortably now and to give him the lifestyle he wants in retirement. His primary concern is reducing his tax bill.
If John puts money in a non-registered investment account, any income earned on those investments will be taxable. If he puts money into a permanent life insurance policy, it can grow tax-exempt. When he passes away, his children–or whomever he has designated as his beneficiaries–will receive the death benefit, tax-free.
This is a simplified example of what can be quite a complex approach. But it goes to show that there are strategies that can help you grow your wealth while minimizing tax as you move forward after a divorce, especially if you are willing to think outside the box.
If adding tax planning to your divorce ‘to do’ list seems overwhelming, just remember you do not have to do it alone. Sit down with your professional team–your tax advisor, your legal advisor, and your wealth advisor–to build a strategy that works for you as you go through the divorce process and move forward financially.
ABOUT THE AUTHOR:
Faisal Karmali is a senior wealth advisor with the Popowich Karmali Advisory Group, media personality, and business and market expert for QR Calgary and CTV. As a portfolio manager, he has dedicated his career to helping people improve their financial security as they prepare for and live in retirement.
Divorce is a significant personal and financial transition. At Crossroads Law, we understand the challenges of reshaping your finances during and after divorce. Our skilled family lawyers are ready to help you navigate these challenges with confidence. We tailor our advice to suit your unique situation, ensuring you're equipped with effective strategies to minimize taxes and secure your financial independence in the years to come. Reach out to us to develop a tailored financial and tax strategy that meets your immediate needs and prepares you for long-term success. Schedule your free consultation today and take the first step towards securing your financial future.
