financial efficiency

Is your new live-in partner financially efficient?

Your new partner is about to move into your home. Now what?

Is your new love partner financially efficient? Or, are you losing money from a new live-in arrangement?

There is a lot written on the web about moving in together: tips and recommendations on how set up a new home together. But, what if someone is moving into an existing household? What if your home is built, decorated, equipped with top-notch technology, and you paid for it during the fun-deprived years of hard work and forced savings?

And now, your new love messes up your house, breaks your Bosch dishwasher and Miele vacuum cleaner? What if your eating habits mismatch so strongly that you don’t own your kitchen anymore? What if your summer hydro bill went sky-high because he/she forgot to close windows on a steam-hot sunny week, but did not forget to turn the a/c on?

Don’t forget your personal tax exemption and child tax benefits! Losing some or all of the tax perks can completely override monthly payment your new partner is offering you.

Where to get guidance?

In the past month, I had several consultations on this topic with men and women recoupling after a divorce. Inspired by their questions and concerns, I have produced a process to calculate your new partner’s utility: Co-Efficient of Utility template that simply tallies up financial pros and cons of the cohabitation.

 

Life Timeline

Life TimeLine Template

Life TimeLine Template

Life TimeLine Template is a foundation document in preparation for divorce.

Get the template here.

Organize your life events: date of cohabitation, marriage, property sales, children birth dates into a one-page document. This will save you money on intake interviews and improve meetings outcome.

https://www.youtube.com/results?search_query=Life+timeline+template+divorce

 

CHANEL purse vs. Stock Options

There is something magical about Chanel purse. But this is not what some men think. Unfortunately. There is also a lot of fun to own some high-risk stock options. Fortunately, most women know little about it. Let’s see.

I never made any serious money on the stock market. But, I am a lucky owner of a Chanel purse for almost a decade, and I can attest that I wore it at least a thousand times. It goes well with any outfit: jeans and striped shirt, business suit, and, of course, a little black dress. Now, when I am thinking, I can actually say I wear it almost daily. In the past 7 years it became a part of me. If you wish, part of my identity.

Being a financial person inside out, I often think that for every time I wore this designer masterpiece it cost me just short of a dollar, and made even mediocre outfits look at least “interesting”.

You can understand how I feel, when I hear some husband (or soon-to-be-ex) complaining his wife splurged good few thousands of dollars on a … Chanel Purse.

It particularly fascinates me, that the very same husbands forget to say how much some of them splurged on hockey games, beer nights, insanely expensive stereo systems, or, how the entire bonus had vanished on the unlucky bets on the stock market.

It was when I was preparing a financial statement for one couple, one husband kept lamenting about his wife spending almost $3,000 of a purse of such kind. He was so upset about it, that we could not move forward until this issue was somehow addressed. I kept thinking if Chanel, indeed, was a reason for their separation.

I stopped my billing clock, brewed him a cup of tea, and asked him to take a deep breath and open up his mind. This is what I told him.

 

  • You can buy a purse for $60, but shortly afterwards it will either fall apart for its low quality or you start hating it. So, we buy another one – different colour, then another one – different style, and another one – just because.
  • As a result, it’s not unusual when dissatisfied women hit the shopping malls and buy, buy, buy in hopes to get satisfaction. My own observations show that few hundreds of hard-earned dollars are spent every year in this kind of frenzy.
  • In 5 years you easily spend $1,500 in search for the right “look”. And, the look is not there. Time and money are spent, and the walk-in closet is cluttered.
  • With a designer purse, you enjoy it for years, even decades. This is why there is a market for vintage and retro designer items.
  • Any outfit – no matter how simple – looks chic;
  • There is always a secondary market for these items, so selling anything Chanel on e-bay, www.kijiji.ca is a matter of few days.

____________________________________________________________________________

Options                                         Monthly, Yearly,  Spending                                      Residual Value

 

  1. Cheap                                    $100/m; $1,200/y; $12,000/decade                           $0 plus clutter
  2. Expensive                    $2,500 per piece, enjoyed for 10 yrs, $20.00/m;               30-50% *

_____________________________________________________________________________

Difference (if pick Chanel)                         Lots of fun and enjoyment                                $1,000 plus

_____________________________________________________________________________

(*) If kept in a good condition, which is easy given the quality of the piece and your own attitude to it.

My client was astonished by this simple math, and agreed that his wife appeared to be not only woman of style but also one of a great mind.

When I suggested to review his stock option losses he politely suggested to leave it for another time. And, I know why. When compared to most of high-risk volatile investments any designer purse   – lovingly made and carefully crafted, making your wife happy – will surely win the race.

This couple did not proceed with a divorce. I saw them downtown Toronto once: well dressed, happy, holding hands. And she… was carrying her beautiful Chanel purse…

 

Tatiana Terekhova

child care costs, divorce, Section 7

My Million Dollar Child – completing Section 7

MY STORY:

Over a decade ago, while fighting in court on a $17,000 date-of-marriage deduction, my ex-husband and I had completely missed the importance of Section 7. We could not imagine that our child care cost would end up just a bit short of 1 million dollars. Mind you, we did not have anything like live-in nanny, private school, horse riding expenses, or any major medical issues.

Children’s Expenses (Special Expenses, Extraordinary Expenses, Section 7) is the most overlooked and underestimated financial issue in separation and divorce. Most people focus on property division values rather than on a full picture of dynamic and unpredictable expenses of raising children.

Call me insensitive, but since my divorce in 2005 I am keeping a tally of my child care expenses. The table is very large and complex and has over 10 categories. Originally, I started it for a reconciliation, but ultimately got used to the process and continue tallying up.

Now, with minimal projected post-secondary tuition costs, I am looking at $572,000 of the total cash outflow. Adjust these numbers for 5% since the year they occurred, and you are getting a whopping number of almost $912,000. Not that far from a million. Just imagine not having a proper Separation Agreement to address who pays for what and how.

SECTION 7 CHILD CARE COSTS:

  1. The very first thing I do, when starting with new clients who have children, is the Section 7.  I have created a template in Excel. It covers the major child care sections: Daycare, Medical, Dental, Education, Extra-Curricular Activities with respective sub-sections: summer camp, prescription medication, special needs therapy, and much more to list here.
  2. I suggest to my clients to take all the time in the world to capture, analyse and project these numbers, create their own categories and do their research, if necessary.
  3. Once I adjust the numbers for all the tax credits and deductions, both parents and their lawyers can see the big picture.

 

HOW TO TRACK CHILD CARE COSTS AFTER A DIVORCE

Michael and Anna (fictitious names) are my clients, they worked on Section 7 using a Dropbox cloud storage. With the help of technology, we could quickly gather all the necessary information and saved time and cost. It also opened up issues they never even thought of; for example, ADHD medication in absence of medical insurance, future orthodontist expenses.

Both appreciated the value of the process and decided to continue using the joint Section 7 folder for their ongoing post-divorce expense reconciliation.

To further smooth the rough edges, I always recommend using a separate payment tool, bank account or a credit card for children’s expenses. And this is why:

  1. You know the running total for each month, year.
  1. It avoids the drama of your ex-spouse seeing and commenting on your personal financial life by simply not seeing your own expenses (for example: $300 spa trip or $250 night out with friends ).
  1. During the tax season, you know where to find your numbers for tax credit and deductions.

CRA has a great source of how-to information related to Section 7. Check it out.

Truly yours,

Tatiana Terekhova

Divorce Financial Analyst

FAIRSPLIT

 

Divorce and Taxes

CRA Tax Status & Divorce: Separation Date

The CRA and Family Law have different definitions on what is considered to be a separation date. For example, under a Family Law’ definition a couple living in the same house, with a number of qualifying circumstances, can be considered separated. This is important for property division.

However, it’s after you physically move out to a different address and stay there for 90 days that you can be considered separated according to the CRA’ definition. Refer to the link: http://www.cra-arc.gc.ca/bnfts/mrtl/menu-eng.html.

This is important to know what is your CRA tax status as it directly affects your Canada Child Tax Benefit entitlement, dependent credits and tax deductions.

 

  • CRA Tax status “Married”

Thomas is earning $100,000/yr and his wife Sandra is earning $30,000/yr., as a married couple they don’t receive any of the CCTB and have no dependent credits.

For the time being, they have not yet decided how to split their matrimonial home and they continue to live under the same roof. They have separate bank accounts, don’t communicate with each other and consider themselves as separated.

Thomas and Sandra file their income taxes separately as Sandra detests the idea of going to the same accountant as Thomas uses. She thinks they both can plot against her.

Both tell their respective accountants that their status is “SEPARATED” and this triggers a retroactive payment of Canadian Child Tax Benefit to Sandra. Looks like good news. But shortly afterwards – just as Sandra have spent newly found fortune – she receives a letter from CRA asking to pay it all back. Why?

Well, the issue is that the CRA received Thomas’s return and eventually something got synchronized in such a way that it became evident that couple lives in the same house. Under this condition, no one is qualified for CCTB. The same goes for dependent credit, childcare deduction, etc.

It is an honest and such an easy-to-make mistake. But, having the same accountant would have caught this issue at the time of filing.

 

  • CRA Tax Status “Separated” 

Derek and Mary were living separately and apart for over a year. The couple has shared custody of both their children. Because the separation agreement was still in the works, they thought their CRA status was “MARRIED”.

By having them file the RC65 (CRA marital status change form) and certify that they lived separately an apart for the past 16 months, we triggered the tax reassessment. Not only both parents got their retroactive share of CCTB but also had their dependent credit applied.

Dependent credit entitlement in the situation of a shared custody is a big issue that largely depends on a proper wording of the respective clause in the separation agreement. Advice from a divorce financial professional is worth thousands of dollars of future tax savings.

The total was $8,070; of which $3,890 was dependent credit for both and $4,180 retroactive child tax benefit. This was a huge relief for both parties and allowed them to pay off mounting credit card debt and left cash on hand to finalize their separation agreement.

RRSP

RRSP & Divorce; hidden wealth

As a financial advisor, I could never agree with ubiquitous RRSP propaganda in Canada. I always spent time educating my clients about the pros and cons of this program. However, when it comes to a property division due to a divorce, registered retirement savings plans represents a huge opportunity for spouses with different marginal tax rates. So huge, that you sometimes wish to divorce just for the sake of it.

The trick is that there is NO attribution rule on spousal RRSP rollover (not to confuse with spousal RRSP), if it is done pursuant to a court order or written separation agreement using CRA Form T2220 (check: http://www.cra-arc.gc.ca/E/pbg/tf/t2220/README.html).

In my practice as a divorce financial analyst, I always make sure to show clients all possible tax savings that divorce-driven RRSP split can have. Whether done by tweaking your existing accounts or creating the new ones, this valuable opportunity should never go unnoticed. After all, thousands of dollars can be saved on both ends of a separating union.

Spousal RRSP to fund equalization payment in Divorce:

Thomas is earning $100,000/yr (43.41% MTR) and his wife Sandra works part-time in the local town library earning $30,000/yr (20%).

Thomas has to pay Sandra an equalization payment of $25,000 pursuant to a Separation Agreement; however he has no cash and does not want to sell his stocks as it will trigger a capital gains tax.

Thomas has room on his RRSP and decides to do a spousal RRSP contribution to Sandra at the grossed up rate or her current marginal tax rate to make it fair. This comes to $31,250. This way after 20% tax, Sandra would be netting $25,000.

To make things more interesting to Sandra, Thomas is making a $35,000 RRSP contribution and Sandra is happy to accept it. Thomas’s MTR of 43.41% allows him to phase out the deduction into several years to get just that; 43.41% tax deduction or $15,193, what in turn makes his cash outlay for equalization payment $19,806.

Also, he secures an RRSP loan with the bank at (!) prime rate, which makes it so much more attractive than drawing his credit cards to the ground, incurring 18% cost and downgrading his credit score.

Family budget

Budget & Divorce

Budgeting is one of the most popular New Year resolutions in North America. Spending wisely, tracking daily expenses, and avoiding costly credit cards are on everyone’s agenda in January.

Regrettably, all this enthusiasm evaporates by the middle of the month. Why? Lack of specific financial goals and no practical knowledge about budgeting are the culprits to blame. Alas, not only can budgeting improve your bottom line but also it can effectively become a life changing exercise. And, it does not cost much!

Unlike many people out there, I enjoy budgets and cash flow analysis. I dive deep into your bank and credit card statements in order to categorize and rationalize expenses. It’s akin to reading a good mystery book or solving a puzzle about someone’s life. It actually compares to studying one’s medical records, so much it is revealed. Like a blood test, cash flow analysis can explain current issues and identify the problems that have not yet occurred. Did you know, that poor budgeting and regular overspending could eventually lead to a divorce?

Often, financial mess is simply a reflection of poor lifestyle choices. Bad habits translate into unjustified overspending. Many people don’t realize that cutting cigarettes and alcohol ($400/month) can buy them a luxury car; eliminating junk food and drive-through breakfasts ($350), fancy clothing; curbing TV (and lengthy commercials with it), time for self-education. Better car, clothes and good books can help to find a better job or a better partner.

As a divorce financial analyst, I help clients with their financial statements – namely, Form 13.1 Financial Statement (Property and Support Claims). I analyze and dissect bank and credit card statements, categorize expenses and rationalize each and every item.

I can tell apart between two people with the same income and their ability to fulfill spousal support obligations; all based on their personal life circumstances. The end findings can be astonishing!

Budget 1: Thomas & Sandra settle on a lower amount

  • Thomas’s income: $100,000/year, IT Consultant;
  • Sandra’s part-time income: $30,000/year, part-time librarian
  • Spousal Support Advisory Guidelines: $1,105 – $1794 per month

The proposed monthly middle range spousal support of $1,449/month seemed to Thomas next to impossible. Thomas’s family lawyer retained FAIRSPLIT to do a thorough budget analysis, which revealed that Thomas’s commute from Guelph to Markham is costing him $1270/month: 407 ETR, excessive wear and tear on the car, higher insurance, and gas.

To get this high paying IT job, Thomas had to take a program, which ended up costing him a little fortune. He financed his tuition costs via student loans and credit cards; so now he is obligated to pay $830/month for the next 7 years.

On the other hand, Sandra has very low commute costs and no childcare expenses, as she works close to home.  Her pension plan at work is very generous for her income, whereas Thomas has to contribute 7% of his earnings to fund his retirement.

All of these financial insights, quantified and summarized into a comprehensive report, showed to both spouses that a more manageable (for Thomas) amount of $950 of monthly spousal support, was sufficient for Sandra to pay her bills and even save $100 for a rainy day thanks to a higher non-taxable child tax benefit.

Budget 2: Derek and Mary settle on a higher amount

  • Derek’s income: $100,000/year, Sales Manager;
  • Mary’s income: $45,000/year, Administrative Assistant;
  • Spousal Support Advisory Guidelines: $545 – $1416 per month

Mary has to commute to work, save for her retirement, and pay rent. She can’t possibly see how would she survive on $922/month (mid.range SSAG). Even the high end of SSAG, $1,416/month, seemed low.

Fairsplit illustrated Derek that once tax deduction is taken, the $1500 gross monthly spousal support is effectively equivalent to a $880 net. Our lifestyle analysis had revealed several ongoing expenses Derek thought little about; excessive banking fees, payment protector insurances on several credit cards, and daily take-outs from restaurants. All totalled to a $1,100/month on average.

Then, we compared $880 vs. $1,100, and were able to show the client that some reasonable budget cuts will easily free up money to pay necessary spousal support.

 

Divorce Myth. “The Woman gets it all”

There is a general public misconception that during the divorce process, women get it all. Though I can’t speak for every single case, I would like to share my professional experience and personal observations.

The Financial aspect of divorce comes down to the following three major issues: financial well being of the children, spousal support and property division.

 

Financial Well Being of the Children

In the past, women (mothers) used to get full custody and primary parenting status. Men (fathers) would only have visitation rights. This would entitle women to 100% of the child support, the full amount of child tax benefits and all available tax deductions and credits.

Today, shared parenting is becoming more and more popular. As a result, child support is payable by both parents to each other, and all tax benefits are split. You can refer to the Government of Canada website for a quick and easy illustration. http://www.justice.gc.ca/eng/fl-df/child-enfant/look-rech.asp

 

Spousal Support

Traditionally, women were homemakers (excellent ones!) and men were the income earners. In this scenario, a woman would often be entitled to receive spousal support. In order to get an idea on how much you would be entitled to, I recommend www.mysupportcalculator.com. However the issue of spousal support entitlement is very complex and legal advice is highly recommended.

As times have changed, so have women’s roles in the workforce. Many women are employed out of the home and may not be entitled to receive spousal support. In fact, many women find themselves in the position of having to pay support to their less financially successful husbands.

 

Property division

Often people believe that everything will be split equally. This is not necessarily the case. Pensions, inheritances, some insurance settlements MAY be excluded from division altogether. Since many assets can’t be physically divided, there are trade offs, offsets, direct rollovers and buyouts to make it more practical and economical.

It’s not unusual to have one spouse keep the matrimonial home, and the other receive a cash settlement for his/her share. The irony is often all friends and neighbors see is that “she got the house and the car”, instead of the real picture “the bigger mortgage and smaller RRSPs”.

If you and your partner are divorcing, don’t get confused by the myths out there. Get yourself organized, run many financial scenarios and avoid costly financial mistakes.

The abandoned school

Anyone who has gone through the home buying process eventually faces this decision – purchase a home in need of renovations (and save money) or purchase a more expensive home that’s live-in ready.  Couples who select the renovation route should do so with a blend of caution and realistic expectations in order not to bury one’s love under never ending construction.

Consider this scenario…

A young couple searching for their first family home settles upon two possible houses: a two-year-old home with no renovations needed, or an older home requiring a number of updates within the next year or two. Consider that the older home is $50,000 cheaper, therefore a very tempting choice. While the desire to save $50,000 may be enough incentive to purchase the older home, a deeper look at this choice may tip the scales in favour of the newer home.

Costs in Disguise

If the couple purchases the newer home, the additional $50,000 in mortgage payments equals $225 per month, based on a 25-year mortgage at 2.5% interest rate. Check with: www.drcalculator.com/mortgage/

If the couple purchases the older home, they immediately face renovation expenses that often come with high interest debt payments. Assuming their entire investment was used for the down payment, they would need to borrow funds. The interest rate on $50,000 from an unsecured line of credit is 6-8%. If paying through credit card debt, the interest rate is much higher at 18%; and, the minimum 3% payment required each month equals $1500 per month – a hefty financial burden for most couples.

Another important financial consideration is the energy efficiency of the home. Many older houses are equipped with outdated windows and doors which can add up to $200 more per month in heating costs during winter months, and additional cooling costs in the hot summer period.

Messy House, Messy Marriage

Finances aside, the couple should think about the implications that a renovation can have on their relationship. They may face months of upheaval due to construction that includes dust, mess, scheduling time to meet with tradesmen, and hand-wringing over design decisions that can further hold up the completion of the project. Even the strongest marriages can be tested during a period of home renovation.

There are some conditions that make the decision to purchase a fixer upper more sense. If one partner is a professional tradesman or is naturally handy and has the time available to work steadily on the project, some of the financial and relationship stresses can be alleviated. In this case, the choice to renovate may be the right one – as long as both partners go into the process understanding what lies ahead.

Make the Right Investment

If the thought ongoing debt alongside months of construction mess – and more than a few arguments over design choices – fills a couple with dread, then spending the extra $50,000 up front on a new or freshly updated home is likely the way to go. As always, be sure to review any paperwork documenting renovations completed by previous owners and always ensure a proper home inspection is done prior to purchase.

Pension and Divorce in Ontario: 3 major steps

Dollar bill in a gold ring

What do you need to know about pension and divorce in Ontario, is that the issue is not any less emotional than the one of a matrimonial home.  The monetary value of a pre-retired teacher’ pension may easily exceed the value of a decent mortgage-free home. Though, unlike real estate, pension is a less tangible asset (when not in pay) and more complex. Here are 3 major steps to take when dealing with pension division during the divorce:

1) Legal and Financial Entitlement 

In Ontario legally married and common-law couples are not treated the same when it comes to pension division. Legal advice is absolutely necessary when dealing with pension division, especially in common-law  situation.

From the Ministry of the Attorney General’s website: http://www.attorneygeneral.jus.gov.on.ca/english/family/divorce/division_of_property/

“These automatic property sharing provisions only apply to married spouses. If you are in a common law relationship, you are not entitled to an equalization payment, but may be entitled to a payment from your spouse to pay you back for a direct or indirect contribution to property that he or she owns”.

With legally married couples, not all the pension value is automatically split. Only the “married years” are subject to division.

2) Pension Valuation for Family Law purpose

Your regular annual pension statement does not have the valuation of your pension as an asset. As of January 2012 the pension plan’s division became more streamlined and simplified. Spouses request pension evaluation directly with the pension administrator for a fee of $600. For more details – refer to:

http://www.fsco.gov.on.ca/en/pensions/Family-Law/Pages/marriage_breakdown.aspx

The pension fund itself can provide for the funds to be rolled over to the member’s ex-spouse’s locked-in retirement account. You no longer have to wait until member’s retirement commences or working out the settlement with other assets.

3) Financial Aspect 

Your pension income will be taxed at the time of the withdrawal. It’s important to project your future retirement income to somewhat estimate the notional tax. You will then have to apply it to achieve a fair split if equating pension asset’ value with the other assets.

Once your pension amount is rolled over to your locked-in investment account – have a solid financial plan on how to manage it. There is nothing more frustrating than, years after division is done,  seeing these assets managed poorly or not managed at all.