The Learning Centre:
The financial impact of divorce
Divorce can be costly and complicated.
Fact: for most people, the biggest effect of divorce is on their relationships. The second biggest effect? Their finances.
How divorce affects your finances can be complicated, and it’s one of the reasons why you should work with a lawyer. You’ll want to know everything from who gets the house and how does alimony work, to how to set up a budget as a single person. Educators Financial Advisor Nadeem Ibrahim, PFP, TEP, says that, “Two of the most common questions education members have about the financial effects of divorce relate to the division of assets and how their teacher’s pension will be affected.”
How are matrimonial assets divided?
You and your spouse can reach a private agreement on how assets are divided, or you can ask the court to decide the question of property division, in which case division of property is decided under the Ontario Family Law Act (FLA). (Note: the FLA applies to married couples only, not common law partners.) The FLA states that when married couples separate or divorce and come to court for property division, each party is entitled to an equalization of net family property. In other words, the value of all assets acquired by the spouses during the marriage will be divided equally.
Here’s a simple example:
Bill and Mary are a married couple getting divorced. Since getting married, Bill has increased his net worth by $100,000. (Note: his worth could have been zero at the time of marriage and increased to $100,000 by the time they separated, or worth $1,000,000 and increased to $1,100,000 by the time of separation – it’s the growth that’s important.)
Mary increased her net worth since the marriage by $80,000.
The difference between them is $20,000. The equalization payment is half, or $10,000, so Bill would pay Mary $10,000.
Some items are excluded from the calculation to equalize the property, such as life insurance proceeds, gifts a party received from a third person during the marriage (not from the other spouse), or an inheritance you can trace. Most importantly, the “matrimonial home” isn’t included in the equalization payment.
The FLA defines the matrimonial home as the home occupied as a couple before separation. The value of the matrimonial home is never deducted from a spouse’s net family property as a date-of-marriage asset, even if that spouse did own the property at the time of marriage. But the home’s value is always included in the assets of the spouse who owns the home (or divided between the two spouses, if the title is held jointly) when the couple separates.
Will divorce affect my pension?
The Ontario Teachers’ Pension Plan (OTPP) states that your pension must be included in the valuation of your family assets. The OTPP calculates the value of your pension that accumulated while you were married, and reports that value – known as the Family Law Value (FLV) – to you. Whether the value of your pension is used to equalize your obligations to each other is optional, and up to you and your spouse.
If you choose to use your pension to equalize your property, your soon-to-be former spouse is entitled to a maximum of 50% of the value of your pension accrued during the time you were married, regardless of how long that was. This will be seen on your future Statement of Pension Benefits as an FLV reduction.
What other major financial impact may I face?
Other issues could include everything from alimony and childcare, to budgeting as a single person. Nadeem can provide you with the advice that you will need on these and other matters if you’re getting divorced.