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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

 

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.