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Kelly: One of the things I would do is is very much tell people be careful again it comes back to that separation agreement and how you’re dividing and deciding on the different support aspects is you want to make sure that there’s not an ability to do that and what I mean by that is you want to choose the way the amounts are being valued based on the full informations of the financial statements not just what that person is taking out of the company every year because they have the ability to leave it in there so it’s not being looked at as their income for the year.

 

Nicky: What’s up CorrNation!  I am your host Nicky Correa, CEO of  CorrWealth Management and you are listening to another episode of Coin for Thought.  

 

Nicky:  What’s up CorrNation!  Welcome to another episode of Coin for Thought!   Today we have Kelly Ross here,  she’s a Chartered Professional Accountant from Ross Professional Corporation.  Thank you Kelly for being on the show. It’s so amazing to have you.  

 

Kelly: Thank you for having me.   It’s a pleasure to be here.

 

Nicky:  Yeah so today I really want to go over kind of like divorce 101 from an accounting perspective and just run through a whole bunch of topics especially a couple of questions that you know maybe both you and I get asked a lot so so in the eyes of you know the CRA what is a divorce,  what is a marriage?

 

Kelly:  So it’s a legal union of some sort but it doesn’t necessarily have to be it doesn’t have to be that you’ve actually gone to the courthouse done the paperwork and all those different aspects.   It could even be common law related of a union so that’s one of the things to kind of keep in mind so when you’re changing a status from a tax filing perspective this could be just from having a common-law marriage of even just one year you’ve been living together. 

 

Nicky:  So if somebody’s been living together for for one year they’re considered common law so say for example if someone wanted to get sort of a cohabitation agreement 

 

Kelly: always a good idea 

 

Nicky: always a good idea and I’m I’m pro pro prenups but you know they should get it before that that one year mark 

 

Kelly:  Definitely,  you definitely want to do that because it’s only at the one year mark that you actually have to start filing as being in a union together 

 

Nicky:  Accounting plays a huge role when it comes to divorce because there’s a lot of stuff going on especially when you have kids you have you know the support aspect of it okay you know for yourself and maybe for your children as well.  You know there’s businesses that need to be appraised, there’s properties that need to be sold so you know from a child care benefits aspect you know.  What do you think about you know how things should be structured I guess what should people do when considering you know getting a divorce and they’re thinking about child care benefits?

 

Kelly:  Well the first thing I usually say is is make sure you’re making some of these decisions before the separation agreement.   Don’t wait till the actual divorce because when the divorce itself is actually happening, they always go back to the separation agreement so that is the most important document.   Really, really important to make sure you’re dotting all your eyes and crossing all your t’s.  Talk to all the experts at that point in time because it’s set in stone so the different things to think about is how you want to do for example if there’s support involved the division between what’s child support and what spousal support because they’re actually taxed very very differently so that’s one aspect you want to think about.  When it comes to the child support, those are not taxed.   When it comes to spousal support those are taxed and the same thing goes from a deduction standpoint so if you’re the one actually doing the paying, for you you’re going to want to be on one side of it and the person who’s receiving is going to want to be on the other side of it.  So the way to be fair in all of that is when you’re coming up with the correct numbers you always want to tax affect it so both sides aren’t arguing about it who’s going to get the benefit on this side and who’s going to get the benefit on that side.   So if you’re an accountant and you’re talking to your accountant and you’re talking to the other person’s accountant, and when lawyers get involved they start to yell and get back and forth on there and argue about the different aspects, but really it comes down to what’s the true number you’re going to pay for tax. 

 

Nicky: Right

 

Kelly:  and that’s why you want to do that you want to think about that piece because it’ll change over the years too based on what your income is going to be so you got to think about your long-term projections of over the time you’re going to be receiving the support as well 

 

Nicky: Right and and you know I feel like people shouldn’t depend on their support for daily living right so you should kind of pretend like that support is really a bonus because especially when it’s it’s coming yearly things could happen and the structure can really change right depending on what happens so and also say for example if you get lump sum support that is in tax versus say for example if you’re getting a monthly support.   So that’s also something that I guess is important to consider but a lot of people say you know hey I’m gonna maybe cash out my retirement to maybe pay a support payment in lump sum and you know what are things that they need to consider when they’re doing something like that?

 

Kelly:  Well, you have to think of where the money’s coming from and what tax implications that’s going to have at that point because if you’re going to cash in for example a retirement plan that you’ve had in there, there’s going to be income that you have to realize in that year so again another tax affecting that you want to do.

 

Nicky:   Right 

 

Kelly: So not only from the support aspect but from where the money is coming from and sourcing from because if you’re cashing something in, there will be a tax your whole taxable income will go up.   So this will not only mean thinking about the tax effect of that piece of it but also your other sources of income because your tax bracket as a whole goes up.   

 

Nicky: Now what’s the difference between like a chartered accountant and a forensic accountant and you know there’s a huge difference in price there too?

 

Kelly:  There is, the difference is with a forensic accountant they get very very minute detail oriented.   So a regular accountant is going to look at things more from a higher level and there’s going to be somewhat some trust involved with the person who’s providing that information to them in order to create whatever documents that they’re doing.   Now a forensic accountant they’re not trusting anything they receive.  They’re actually going into the minute details of those different aspects.   A lot of times where I see forensic accountants come and get involved in the different aspects is because for example maybe somebody,  and a lot of times this comes up in divorces because they’re not amicable and the two parties are arguing and one doesn’t trust the other.   So a forensic accountant can really help you out in that different aspect especially if you’re dealing with a person on the other side who’s a lot more savvy in that area than you are yourself.

 

Nicky:   In your experience, I mean for me like based on my experience, forensic accountants have have charged people that i’ve known and my clients anywhere from $75,000 to like $125000.

 

Kelly: Yeah it’s very very expensive, very expensive and it’s because they’re going into those minute details and and basically proving validity of every aspect whereas an accountant’s not gonna be proving the validity of the documents that they’re receiving they’re going to be working with the documents they’re receiving.  That’s the difference.

 

Nicky:  Okay,  there’s a lot of scenarios where someone who say for example has a husband or a wife that was a business owner, they always say okay well you know they had they were in you know working with their accountant and their accountant was shady and you know they were doing a lot of things that were under the table.   Describe that kind of accounting where you know what makes someone from the outside call an accountant shady?

 

Kelly:  So it’s really the interpretation I would say of of what somebody calls shady because with corporations when you have businesses you have the ability to do a lot of deferral so it’s not necessarily that you’re being shady but it could be deferring it to a different period so when it comes to divorce and separation they can manipulate the numbers between different periods to get them where they want them when they want them,   So that that would be what what they have the ability to do but again it’s within tax rules.  In my mind, when you would actually call somebody shady is when they’re not working within the tax rules and and they’re starting to do something a little more funky where you know what over a couple of years it should always come back to the same spot when it comes to the income having to be realized at some point in time but if it doesn’t within a couple of years and they’re ignoring those tax rules that’s a little different.  

 

Nicky:  yeah 

 

Kelly: So one of the things I would do is is very much tell people be careful again it comes back to that separation agreement and how you’re dividing in and deciding on the different support aspects,  is you want to make sure that there’s not an ability to do that and what I mean by that is you want to choose the way the amounts are being valued based on the full informations of the financial statements not just what that person is taking out of the company every year because they have the ability to leave it in there so it’s not being looked at as their income for the year.

 

Nicky:   Yeah that’s why you know during the financial disclosure they get pretty thorough right 

 

Kelly: Yes

 

Nicky: So they ask for a lot of these documents too and it’s important that people provide these documents so you have a full understanding of what the actual incomes are.

 

Kelly:  Yeah, you have to, you have to.   One of the most important numbers are going to be your retained earnings number because that is your profit overall the multitude of years what’s a what’s available to come out of the business at any point in time based on what’s happened up to that period so when you’re valuing it very important number to have.   The other one is what’s called their due to shareholder account that due to shareholder account is the amount of money that comes out of the corporation tax-free at any point in time and doesn’t get reported as income.   So two really key numbers.

 

Nicky:   Okay, so it’s important really you know if someone’s looking to get a divorce to really consult an accountant to say you know how is this really going to affect my finances, how especially if they’re business owners really, you know where do shareholders play a part in all of this say one of the shareholders is getting a divorce how are the others affected.  

 

Kelly:  So this is interesting because this is something that a lot of people don’t think about because the ownership on the corporations may be multitude of people so it’s not as simple as saying okay I’ve got a divorce so they’re not on it anymore.   You can’t just say that.   Some people think that’s just well doesn’t it automatically happen and it’s like no, it doesn’t you have to actually get rid of the shares.   So they’re if they’re holding 50 percent of the shares, you need to be somehow buy them back or they have to surrender the shares based on, if there was some sort of a shareholder agreement originally done there’s gonna it’s gonna specifically say how that would happen.   If there was never an official legal document for the shareholder for the shares to be issued then you would go into okay how are we gonna do this and and really you’d value what it is.   So you would value what the company is.   This is one where you definitely want an accountant to do evaluation on there.   There might even be both sides might want to do the valuation to make sure they compare it because there are different methods to use for that and based on the multitude of years because you don’t want to look at just one year, you want to look at probably about five years to really see the trend on there when you’re doing the valuation properly to make sure you’re using the right method to value it properly and then this the shares are going to be sold from the one spouse to the other or surrendered if it ends up being sold then we use that valuation and that gets taken into consideration when it comes to division dividing up the different assets so those shares will become part of that whole division.  

 

Nicky:  okay 

 

Kelly: based on the value that’s still that the companies consider to be worth at that point in time.

 

Nicky:  Right.  How does it work when you know how to tax laws and employment laws come into place when especially when you know say for example a business owner is divorcing say for example someone who works in the company and their wife or their husband they work together and they’re an employee right, so how does that how does that kind of play out because now it’s tapping into two different things.

 

Kelly:  Well it would be pretty much the same kind of thing like you’d still go by the ESA which is the employment standards act because the corporation even though it might be 100 percent shareholders is one of the spouses versus the other it’s still its own entity it’s not that person so it’s a separate person basically when it comes to the law so it still has to abide by all of those different legal aspects.   Now this is one of those things that would be great if you’re planning ahead of time because you could have some sort of a legal agreement with respect to that saying because I’m the spouse of the shareholder this is the scenario that it would be and this is what would happen to protect you way beforehand.

 

Nicky: Okay, it’s good to know because like a lot of people you know say for example if if you’re working for a company and your husband or your wife owns the company, it’s divorce can be so incredibly expensive and now all of a sudden you’re you’re wondering am I gonna have this job, am I not, am I gonna be laid off from from my job and how is that really going to work and is that something that could actually happen.

 

Kelly:  Yeah well, also think about this different aspect which is if that were to happen, then you want to make sure also or if that’s even of risk you want to make sure that’s in the separation agreement too where there’s a caveat to that which is, in the event that I’m no longer an employee of this corporation, this income needs to be supplemented and will be additional spousal support right something along those lines so if the job’s taken away then the support goes up because he still got the business.

 

Nicky:  Right, right.   So let’s talk about capital gains for a second 

 

Kelly:  Yeah

 

Nicky: because there’s a lot of people who might have properties that they need to sell and some of those properties a lot of them might be getting sold in say a year over versus say for example normally they would get sold over a span of many years right

 

Kelly:   Right 

 

Nicky: So all of a sudden now you have a large tax bill at the end of the year because so much is going on and at the same time you want to be able to complete your divorce as quick as possible but then there’s a huge liability also to that as well right.

 

Kelly: There is definitely.  So there’s capital gains to consider in in these different scenarios.  So when it comes to actually selling property, so property will include the shares as wel,l so that’s something to think about so when the shares are actually being done, then those need to you can use your capital gains exemption if it falls underneath small business shares which hopefully it does, which is $500,000 of taxable income at the end of the day in the business and if it does then you can use a capital gains exemption which is over eight hundred thousand everybody’s got for a lifetime to be able to use to offset that but it’s only for small business shares that you’re able to use that exemption for it.   Now if there’s other property which is like actual homes and what not, if it’s the home that you’ve been living in together, then this is and it’s the only home you own, this is an easy one there’s no capital gains at all.  You you would be using your principal residency exemption to offset that, no tax to pay.   Now if they’re going to change that now they’re trying to add you know 

 

Nicky:  I know 

 

Kelly: they’ve but they’ve been talking about it for years right 

 

Nicky:  Yeah 

 

Kelly: So there’s been talks on the table for years about that aspect as well as even the capital gains rate of that not only being at 50 percent value which it is now potentially raising that to 75 or 100 percent.  So that’s going to be a tough one that I think they’ll always be fought on every time they keep trying to bring it to the table and that’s why it’s not changed so far.  For as long as I can remember they’ve been they’ve been talking about it.

 

Nicky:  Right, right.   So you know you have people they’re selling properties and they you know they do really need to speak with an accountant they do need to really budget what their tax bill is going to be and figure out how to potentially offset that right whether you know RRSPs or whatever the case is but it’s something to be cautious cautious about it especially if say for example, maybe if you’re putting a property on sale towards the end of the year, maybe you want to be able to put it on next year

 

Kelly:  yeah 

 

Nicky: in the spring right 

 

Kelly: and that’s definitely you want you might want to play between the different years and that’s something really important to understand because your tax brackets all are based on your income levels and that’s your income from all sources so if you can split that between a multitude of years sometimes that makes much more sense.   Now if you’re going to end up in the highest tax bracket in in both years for example in that scenario, you actually might want to just do it under the one sometimes I tell people I know it’s a lot of a hit at once but sometimes it’s better because at least then next year when you still have pretty high income you’re not pushing it still into that high tax bracket where all your income’s taxed at that high rate so it really depends on the situation.  

 

Nicky:  No, these are all really amazing points and what would you say, what would what kind of advice would you give to somebody who’s going through a divorce say for example, they haven’t seen an accountant, what are a couple of things that you would want to maybe point out for them to know?

 

Kelly: Really the biggest thing is identification.  Identify what it is that you have and not just you personally but the spouse has as well because it’s really important to think of all the different aspects and there’s little things that you may not think about so even outside of just the business but what about pension plans and not just the one for the place that they’re currently working at but what about the ones they’ve been working at for the job before that,  the job before that, the job before that, because all of a sudden all these different pieces start coming out of the woodwork that may not even have been thought about even by the other person 

 

Nicky: right 

 

Kelly: You might know so even if somebody’s working for a union for example, they’ve got a pension plan there.   What if they switched their unions.  Well there’s two union plans now to think about that might have pieces in there that now need to be valued and taken into play.   Then there’s also the aspect of the kids.   If there’s kids involved what expenses are there for them?  So maybe there’s a lot of extracurricular activities.   I myself have kids who are playing high level hockey and as as well as competitive dance so two very very expensive things.

 

Nicky:   okay 

 

Kelly: So how are those going to get paid for, how are we agreeing upon expenses related to that is it going to be 50-50 and if it is 50-50, how are we both paying the person directly, is it all coming through one person to make sure the bill gets paid, all of those are different little minute details that you want to make sure that you fully understand.   The other thing is tax reporting is really important in notifying the government right away once the status changes because otherwise what you might end up in a situation for, is when it comes to like child tax benefits or GST credits if you receive any of those, all of a sudden you might show up with a bill to repay a whole bunch of those benefits because you were late in notifying them of that status change and those benefits do change so in some situations it might drop, in some situations it might go up and it all depends on what your individual situation is.   Most, in most scenarios it it usually goes up for the female and it usually goes down for the male, if the male was the one who was collecting it at that point in time and a lot of that has to do with the fact that you’re going in and you’re you’re having a discussion with them and it goes back to the separation agreement but it’s never the same thing for the same person or this or sorry not the same person for every person.  It’s always going to be different for the different scenarios in the different situations and I couldn’t tell you what that amount would be for everybody because the amount changes based on what your income level is.

 

Nicky:  Yeah and you know child care benefit is really you know it’s calculated based on net right 

 

Kelly: That’s right

 

Nicky:  Yeah so net income so that’s key and also um I believe it’s 90 days.   If if you’re separated for 90 days you need to be able to inform the CRA.

 

Kelly: That’s right 

 

Nicky: Yeah 

 

Kelly: That’s right

 

Nicky: So yeah those are key things especially and I and I understand this about you know I understand how important it is to really understand what your assets are especially if you’re trading your assets right 

 

Kelly: Yes

 

Nicky:  because you have all these assets on the table and you might not want to sell them but you might want to say okay like I’ll take this you take that and sometimes there’s tax consequences to that as well.

 

Kelly:  Absolutely, and that’s and you make a really good point there because you really want to be careful as to how much you’re cashing in.   So if if one person for example has the pension plans and the other person doesn’t have one, it might not make sense to cash in that pension plan.  It might actually make sense to leave that with them but then instead you take the house and you you kind of divvy it that that way as opposed to trying to sell all these different assets because think about if you were going to sell the cash in the pension plan which you would never end up with the same value if you’re cashing it in early, you’re going to go and you’re going to sell the house and you’re going to have capital gains to pay on there, you’ll have the taxes to pay on the pension side.   Now you guys are probably down more than half because once you’re in the highest tax bracket, you’re paying the government more than half of what your income is right.   So the CRA is winning not you.  So sell as little as you possibly can, is is really the advice that I have and try to do the division based on what each one of you has so this is where listing out those assets that I mentioned earlier like really take an inventory of what each one of you has and figure out what you can kind of swap for with each other but then also make sure they speak with somebody like yourself who can tell them okay now realistically I know you want the house but you’re going to have the house and no cash how are you going to pull the house right.

 

Nicky: Yeah a lot of people you know they hold on to that matrimonial home but it’s like you’re going to be eating ramen with the lights off.  You’re not going to be able to really afford to live in this house because from a cash flow perspective, there’s two incomes that have now turned into one right and it took two incomes to qualify to buy that home and maintain that home so 

 

Kelly: Yeah so you might be forced even if you were to get it at the end like through the division of assets when the mortgage renewal comes up where you don’t get it anymore.  

 

Nicky: Right, you may not qualify for it right and and that that’s a huge game changer right and you also have to think about your credit right you can qualify not only just from an income standpoint but also from a credit standpoint right.  

 

Kelly:  Absolutely, so that’s one of the things to really watch while you’re going through a separation and this is where I see a lot of people actually completely mess up their credit and it’s the most important time to make sure you don’t, cancel the cards you’re worried about somebody starting to spend money on the cards, cancel the card so there’s no cards to spend.

 

Nicky:  yeah 

 

Kelly: money on 

 

Nicky: and the money is already spent you know.   You pay them off and then let your lawyer know right and then all of those expenses will be equalized because if you say oh well you know he spent this much money on our say joint Costco card and then you know you’re not paying it off that’s that’s a hit to your credit right.  

 

Kelly: Absolutely 

 

Nicky: Yeah so can you talk a little bit about notional tax and what what it is because that’s something that’s calculated and lawyers kind of put that in to calculate it as like 20 or 25 or 30 percent depending on you know the the lawyer I guess and they put that in on on the disclosure so can you describe what notional taxes and how that works?

 

Kelly: So the notional tax is basically a fill-in for taxes that aren’t done yet right so what is that rate basically it’s an estimation of what the tax rate would really be and the tax that would be paid on the income going forward.  So this comes back to the tax brackets as well so when the notional amount is coming in there,  you want to make sure that it’s actually the right number because a lot of times I see that notional amount is not right and I’ve gone back and forth with a lawyer and said no, your number is not good like that’s not realistic so when you’re dividing these assets you have to be more realistic.  Their tax bracket is not really 20 percent, their tax bracket’s more like 46. so then you want them to make sure they’re adjusting it properly so they’re not losing out in the end otherwise that’s an additional potentially 20 something percent that you could be losing out on when you’re dividing those assets.   Once that notional piece is put in because it’s the wrong number so you want to pay attention to each one of those numbers very very specifically and make sure they’re right and realistic to what you actually pay or would be paying.

 

Nicky: Yeah so it’s amazing you can you can get your account to really calculate what your actual notional tax is and then you can communicate that with your lawyer to kind of put the accurate number on your financial disclosure right so 

 

Kelly: Exactly and in most scenarios well I would say not even most in probably all scenarios, asking your accountant to do that calculation and telling your lawyer that the accountant will provide it it’ll be cheaper for you than the lawyer creating one and it’s going to be wrong anyway.

 

Nicky: Yes 

 

Kelly: no you’re using their available time their billable hourly rates are going to be more than your accountant’s hourly rates 

 

Nicky: Yeah totally.  So what are, you know last bit of takeaways that you have to say to to anybody who’s kind of going through this you know uh this whole process?

 

Kelly: Take a deep breath, don’t rush it.  Take your time and do it right because it’s really really important because it’s the long-term impact that it’s going to have on you and especially when there’s kids involved on them and what you can provide for them moving forward so it’s really important to take the time get into the details get the right people involved who have the right answers to make sure that it’s done and they’re looking out for you.  Don’t trust the other side’s professionals to tell you what’s good for you because they’re going to be looking at it from the other angle.   I can tell you right now in every scenario what I will tell somebody to do, it depends on which side of the fence they’re on because it’s going to be a different effect of what works out better for them.  I can tell them what the fair number is and usually when I run some numbers I tell them okay if I was running this for the other person these are the numbers I would tell them.   I’m running them for you so these are the numbers I’ll tell you.  So go in with these numbers but realistically take this number, if you get it, if you can agree to it and I can tell them the median number that’s actually the fair number between both parties.

 

Nicky: and it’s nice to have that range because divorce is something that’s so emotional and you want a certain number but you’re not getting a certain number and it’s nice to know what is a realistic number to really you know really expect so you can kind of get that right right.

 

Kelly:  Yeah and you know what and it also depends on on on the couple that is separating and divorcing because i’ve seen some pretty nasty ones happen and then I see some very I see ones where they really care about each other and neither one of them wants the other one to be ripped off in any sense of the word and they want them to be okay.   So a lot of times, I may see people who actually ask me for that middle number.  Well, what is the middle number so it’s fair on both sides?   Okay, well it’s this number that’s the number then you guys should use and sometimes the client might actually be somebody who I had been doing taxes for for multiple years so I know both sides of them I know both of them very well and they actually both will agree because they’re trying to go the amicable way and not hurt each other.   They’ll actually have me run the numbers for both of them and share the numbers to both of them and then they can come up with a fair number together so it really depends on the situation.

 

Nicky:  I know like we share clients together and I know that you have like such a holistic point of view and in the way that you work and your style and you know I think that that’s also so important for people to recognize like who is in their court, what are professionals that they’re going to need during a divorce and it’s not just a lawyer right 

 

Kelly: Yeah

 

Nicky:  It’s not just a lawyer and there’s a lot of ways that you can get a lot of information from other professionals that will help and support you not just for for your process but also past your process.  You know creating your new life and you know figuring things out and you know filing taxes as a single person and figuring out what that’s even like right 

 

Kelly: yes, and there’s projections that can be done in all those different scenarios as well so like a projected tax return of what it would have what it would look like if we were to even redo the tax return that was done the year before we can do that and say okay if you weren’t actually together in this year and this is what your years are going to look like moving forward this is how it would have changed.

 

Nicky: Yeah 

 

Kelly: and then they can actually see what that would look like to know what what’s coming ahead.

 

Nicky: and I think it’s important for people to really ask those questions to their accountants because sometimes accountants are not so chatty and forward with all of this information they might have it but it’s it’s up to you to be able to inform your accountant that this is something that is happening in your life and you know this is the kind of support you need and really challenge them in that way 

 

Kelly: Yeah ask,  that’s the biggest thing you’ve got to ask because I guarantee that, I guarantee for anybody who’s got an account there’s a lot more they can do for them than what they’re actually doing and even myself I’m like sometimes if I pick up on something I’ll say something to people but I also don’t want to be come across as being salesy either to people where they feel like I’m trying to always tell them something more than they really want or they don’t have time for it but if you bring up a topic,  I’ll start to give you some little hints as to maybe a direction of a conversation you might want to have at some point in time right and that’s something to maybe ask your accountants every year even is there anything else I should really be considering now that you know my situation 

Nicky: Right 

 

Kelly: Then they can continue to go on from there.

 

Nicky: Well Kelly thank you so much for all this amazing information.   Thank you for coming on the show.   It was such a pleasure having you 

 

Kelly: Oh thank you for having me.   It was great to see you and to and to speak with you as always 

 

Nicky: Yeah, well if you’d like to work with Kelly definitely check out the links below, if you’d like to reach out to her about any divorce question or tax question in general.   Don’t forget to like, subscribe and hit that notification bell for more videos to come.   See you next time.  Bye.