Divorce is complex and confusing, especially when it comes to your money. After all, for most people divorce is less about the legalities and more about your children, the tax implications, and making smart money decisions. Even something that seems as simple as splitting assets can lead to unwanted financial headaches. It may seem all too obvious to you that you should split everything down the middle, but that doesn’t take into account how different assets are taxed. You may quickly find out that you take a significant tax hit while your spouse is tax exempt. Let me give you an idea of how this might play out:

You and your spouse have decided to divorce and are working out how to divide your assets. The only assets you have are a $100,000 bank account and a $100,000 RRSP account. You create a separation agreement which states that you will take the $100,000 RRSP and your spouse will take the $100,000 bank account. You have just split your assets down the middle, right? Wrong!

Your spouse has $100,000 in cash in a bank account that is immediately available to them on a tax-free basis. However, while your $100,000 RRSP can be transferred to you tax-free, you will be taxed as soon as you take the money out of it. If you are taxed at a 20% rate (for the purposes of this example), your RRSP will only be worth $80,000. This creates a difference of $20,000 between you and your spouse. To make up the difference, you should actually receive $10,000 from the bank account in addition to the $100,000 RRSP. This would mean you both receive $90,000 in total.

These types of tax implications in the divorce process are the reason it is wise to speak to a professional before you make any important decisions with regards to your separation agreement. A Certified Divorce Financial Analyst (“CDFA”) can assist you in creating a separation agreement that properly values your assets and will help you make financially savvy money decisions.