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Keeping Your Piece of the Pie

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11597904_sHow in your divorce you can wind up losing one of your most important investments?

For most people in Ontario their home represents one of their largest and most important investments, yet most people might be surprised how the law treats the home on marriage breakdown.

When a couple separates, their net family property (the increase in all of their assets, less their accumulated liabilities, after assets and liabilities brought into the marriage are first taken out by them) is shared equally between them.  The spouse holding the greater amount of net family property makes an “equalization payment” to the other spouse so they end up with an equal share of the pie.

However, the matrimonial home has special status.  While it might seem sensible that a spouse who paid in full for the matrimonial home and brought it into the marriage should end up with their investment back at the end of the day (as is the case with other assets brought in, above), think again!

Under the Family Law Act, it does not matter if a spouse independently purchased the home prior to the date of marriage, or made a significantly larger contribution to the acquisition of the matrimonial home before or after marriage (regardless of the source of funds, even inheritances or gifts).  Once both parties reside in the home as the primary family residence, the law provides that the value of the matrimonial home be shared equally between the parties if the marriage ends.

The current state of the law creates a serious risk of a highly inequitable result.  Consider this example:

Before Jack and Jill married, each had $300,000 in the bank.  Following the marriage, Jack used his $300,000 to purchase a home for the family. Jack and Jill later divorce.  While the law permits Jill to exclude from equalization the value of her pre-marriage bank account, Jack is required to equally share the value of the matrimonial home with Jill.   Even though Jack came into the marriage with the same amount of assets as Jill, since it was used to acquire the matrimonial home he cannot recover the full amount.

The law provides for an exception to this.  If a spouse brings a home into the marriage that becomes the matrimonial home, but it is subsequently sold, that spouse’s equity in the original home will then be exempt from equalization (in other words, that person gets to take that amount out first).

Clearly, none of this makes sense. Yet that is the state of the law. So what does this mean for you?  If you are the one who brings the home into the marriage, you should try and get it sold and buy another house for the family to live in.  But if you are the spouse who did not bring it in, you want to stay in it! Family lawyers in Ontario have been pushing for years to change this nonsensical provision of the Family Law Act.

Marriage and cohabitation agreements can sometimes assist to restrict the effect of the Family Law Act over your assets, but there are still some limits with respect to the matrimonial home.

If you are uncertain of your situation or have questions, you should contact an experienced family lawyer.  Being proactive to ensure you keep your fair share of the pie is always a good idea, in the event the unthinkable comes to pass.

Article compliments of Stephen Durbin Professional Corporation. For information contact info@stephendurbin.ca

Four ways single seniors lose out

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Becoming single in old age could cost you tens of thousands of dollars through no fault of your own. The current tax and pension system in Canada is significantly tilted to benefit couples over singles once you are age 65 or more.

I don’t think it is an intentionally evil plan of the Canada Revenue Agency and other government agencies, but something has to change. Given the fact that so many more single seniors are female, this unfairness is almost an added tax on women.

StatsCan recently came out with census data that said that among the population aged 65 and over, 56% lived as part of a couple. This 56% of couples was split out as 72% of men, and just 44% of women. Among those aged 85 and over, 46% of men and just 10% of women lived as part of a couple. This gap is made up of two factors. Women live longer than men, and men tend to marry younger women.

Here are four ways that single seniors lose out:

  • There is no one to split income with. Since the rules changed to allow for income splitting of almost all income for those aged 65 or older, it has meaningfully lowered tax rates for some. For example, in Ontario, if one spouse has an income of $90,000 and the other has an income of $10,000, their tax bill would be $22,571. If instead, their income was $50,000 each their tax bill would only be $17,774, a pure tax savings of $4,797 per year. If you are single, you are stuck with the higher tax bill.
  • Let’s say the 65-year-old couple both make $50,000, and qualify for full Canada Pension Plan. In 2012, that would be a total of $986.67 per month at age 65 for both of them or $23,680 annually for both combined. If one passes away, the government doesn’t pay out more than the maximum for CPP to the surviving spouse. They will top up someone’s CPP if it is below the maximum, but in this case, they simply lose out almost $12,000 a year. They would receive a one-time death benefit of a maximum of $2,500, but that is all.
  • RSP/RIF gets folded into one account. This becomes important as you get older and a larger amount of money is withdrawn by a single person each year — and taxed on income. Let’s say a husband and wife each have $400,000 in their RIF and they are age 75. They are forced to withdraw $31,400 each or 7.85%. If the husband passes away, the two accounts get combined, and now his wife is 76, with a RIF of maybe $775,000. At that amount, she would have a minimum withdrawal of $61,923. As in the first example, her tax bill will be much larger when she was 76, than the combined tax bill the year before, even though they have essentially the same assets, and roughly the same income is withdrawn.
  • Old Age Security. The married couple with $50,000 of income each, both qualify for full Old Age Security — which is now $540.12 a month or $12,962 a year combined. If the husband passes away, you lose his OAS, about $6,500. On top of that, in the example in #3, the wife now has a minimum RIF income of $61,923, and combined with CPP and any other income, she is now getting OAS clawed back.

The clawback starts at $69,562, and the OAS declines by 15¢ for every $1 of income beyond $69,562. If we assume that the widow now has an income of $80,000, her OAS will be cut to $414.50 a month or another $1,500 annual hit simply because she is now single. In total, almost $8,000 of Old Age Security has now disappeared. As you can see, a couple’s net after-tax income can drop as much as $25,000 after one becomes single.

On the other side, there is no question that expenses will decline being one person instead of two, but the expenses don’t drop in half. We usually see a decline of about 15% to 30%, because items like housing and utilities usually don’t change much, and many other expenses only see small declines.

In one analysis our company did comparing the ultimate estate size of a couple who both pass away at age 90, as compared to one where one of them passes away at age 70 and the other lives to 90, the estate size was over $500,000 larger when both lived to age 90 – even with higher expenses.

So the question becomes, what can you do about this?
I have three suggestions:

  • Write a letter to your MP along with this article, and demand that the tax system be made more fair for single seniors. You may also want to send a letter to Status of Women Minister Rona Ambrose, as this issue clearly affects women more than men.
  • Look at having permanent life insurance on both members of a couple to compensate for the gaps. Many people have life insurance that they drop after a certain age. The life insurance option certainly isn’t a necessity, but can be a solution that provides a better return on investment than many alternatives and covers off this gap well. If you have sufficient wealth that you will be leaving a meaningful estate anyway, this usually will grow the overall estate value as compared to not having the insurance — and not hurt your standard of living in any way.
  • Consider a common law relationship for tax purposes. I am only half joking. If two single seniors get together and write a pre-nuptial agreement to protect assets in the case of a separation or death, you can both benefit from the tax savings.

Ultimately, the status quo is simply unfair to single seniors, and that needs to change.

Ted Rechtshaffen is a regular contributor to the National Post, see http://business.financialpost.com/author/fptedrechtshaffen/

If you have questions or want to discuss your personal situation, please call Ted at 1-888-816-8927 x221 or email him at tedr@tridelta.ca.

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