Protecting Your Assets in a Divorce
Divorce can be an emotionally challenging experience, and it often comes with significant financial implications. One of the most critical aspects of a divorce is the division of assets, which can have a lasting impact on your financial well-being. If you are going through a divorce in Ontario, understanding how to protect your assets is essential to ensuring a fair and equitable outcome. This guide will walk you through the key steps and considerations for safeguarding your assets during the divorce process.
1. Understand the Legal Framework
Ontario follows the principle of equalization of net family property (NFP) when dividing assets during a divorce. This is done in a series of steps. First, you calculate each party’s net worth on two specific dates, the date of marriage and the date of separation. This is typically done using a Financial Statement (Form 13.1). Next, you compare each party’s change in net worth from the date of marriage to the date of separation. Finally, the spouse whose net worth increased the most pays 1/2 of the difference in their change in net worth to the spouse whose net worth increased the least. The latter steps are typically completed using a form 13B Net Family Property Statement. While relatively straightforward, the calculation has exceptions.
Key assets typically considered in the division process include:
- The matrimonial home
- Savings and investments
- Pensions and retirement accounts including any survivor benefits
- Business interests
- Personal property, such as vehicles and valuable collections
- Intellectual property
- Real estate
- Luxury goods
- ATVs, boats, tractors, and other tools
Understanding how these assets are valued and divided under Ontario law is the first step in protecting your financial interests.
2. Take an Accurate Inventory of Your Assets
Before engaging in negotiations or court proceedings, it’s crucial to take a detailed inventory of all your assets and liabilities. This includes not only the obvious assets like real estate and bank accounts but also less apparent items such as collectibles, intellectual property, and potential inheritances.
Steps to take include:
- Gather financial statements, tax returns, and property deeds.
- Obtain valuations for real estate, businesses, and personal property.
- Review account statements for retirement funds, pensions, and investment portfolios.
- Document any debts, including mortgages, credit card balances, and personal loans.
Having a clear and comprehensive understanding of your financial picture will enable you to make informed decisions and protect your interests during the divorce.
3. Consider the Matrimonial Home
The matrimonial home often represents one of the most significant assets in a divorce. In Ontario, the matrimonial home is treated differently from other assets. Regardless of whose name is on the title, both spouses have an equal right to reside in the home after separation. Neither spouse can get credit for any equity in the matrimonial home owned on the date of marriage. Additionally, a home can cease to be a matrimonial home and you can have more than one matrimonial home on the date of separation. You can get credit for a matrimonial home that you owned on the date of marriage if it is no longer a matrimonial home on the date of separation. Overall, while the equalization calculation is relatively straightforward, there is nuance in the way it is calculated.
To protect your interests regarding the matrimonial home:
- Determine whether you want to keep the home, sell it, or have your spouse buy out your share.
- Understand that both spouses may have an equal claim to the home’s value, but debts like mortgages will be considered in the equalization process.
- If you wish to stay in the home, ensure you can afford the mortgage, taxes, and maintenance on your own.
It’s important to seek legal advice specific to your situation to navigate the complexities surrounding the matrimonial home.
4. Protect Your Business Interests
If you own a business, it’s vital to take steps to protect it during a divorce. Your business is likely considered part of the marital assets, and its value will be included in the NFP calculation.
Strategies for protecting your business include:
- Prenuptial or Postnuptial Agreements: If you have a prenuptial or postnuptial agreement (the technical term is a marriage contract in Ontario) that addresses the division of business assets, it may offer some protection.
- Valuation: Obtain an accurate, independent valuation of your business to ensure a fair assessment.
- Shareholder Agreements: If your business has multiple owners, a well-drafted shareholder agreement can outline what happens in the event of a divorce, protecting the business’s continuity.
- Tax experts: Qualified CPAs can provide tax guidance to better determine a corporations after-tax value using a variety of scenarios and options such as what is commonly referred to as a butterfly transaction or scenarios where equalization is paid over a number of years incurring a variety personal income taxes taxed at your marginal tax rate.
Consulting with a lawyer who specializes in family law and who has experience with business assets and working with experts can help you navigate this complex area.
5. Manage Joint Accounts and Liabilities
During a divorce, it’s important to address joint accounts and liabilities promptly. Joint accounts can pose a risk if one spouse decides to withdraw funds without the other’s consent.
To protect your financial interests:
- Freeze or Close Joint Accounts: Consider freezing or closing joint accounts to prevent unauthorized transactions.
- Notify Creditors: Inform creditors of the pending divorce and discuss how to handle joint debts. This can prevent your credit score from being impacted by missed payments.
- Set Up Separate Accounts: Transition to separate accounts to clearly delineate your finances from your spouse’s.
Taking these steps can help ensure that your assets are protected from potential misuse during the divorce process.
6. Consider Tax Implications
Divorce can have significant tax implications, especially when it comes to the division of assets like investments, pensions, and property.
Key tax considerations include:
- Capital Gains Tax: The sale of assets, such as the matrimonial home or investments, may trigger capital gains tax, which should be factored into the division of assets.
- RRSPs and Pensions: The transfer of RRSPs or pension assets may be tax-deferred under certain conditions, but it’s essential to understand the rules and potential liabilities.
- Spousal Support: Spousal support payments are taxable income for the recipient and tax-deductible for the payer, which can influence settlement negotiations. The issue gets more complicated when dealing with lump sums including lump sums of support to satisfy arrears of support.
Consulting with a tax professional who understands divorce-related issues can help you minimize the tax impact of asset division.
7. Seek Professional Advice
Divorce is a complex legal process, and protecting your assets requires careful planning and expert advice. Working with a team of professionals, including a family law lawyer, financial advisor, and tax specialist, can help you navigate the process and ensure that your interests are safeguarded.
A family law lawyer can provide legal advice specific to Ontario’s laws, represent you in negotiations, and help you understand your rights and obligations.
A financial advisor can help you plan for your financial future, including budgeting, investment strategies, and retirement planning post-divorce.
A tax specialist can assist in understanding the tax implications of asset division and spousal support, helping you make informed decisions.
Protecting your assets during a divorce in Ontario requires a proactive approach and a clear understanding of your legal rights and financial situation. By taking the steps outlined in this guide—such as understanding the legal framework, accurately inventorying your assets, considering tax implications, and seeking professional advice—you can safeguard your financial future and achieve a fair outcome.
Divorce is never easy, but with careful planning and the right support, you can navigate the process with confidence and protect what matters most to you. Contact us today at 1-800-838-9929 to book your consultation!