Physicians and Divorce: Some Important Financial Considerations
Sebastien Chevrier - Nov 10, 2020
The pandemic has caused severe turbulence in our personal and professional lives. As a consequence, divorce rates have increased across Canada. Here are some financial considerations to keep in mind for physicians going through a divorce.
This year has challenged all of us in unexpected ways. The impact of the pandemic has strained us all in our work lives, physicians and front-line workers being some of the most significantly impacted. The effects have had a substantial impact on our personal lives as well. Unfortunately, as a consequence, we have seen divorce rates increase across Canada amidst the COVID-19 pandemic.  Restrictions that have confined partners to the home combined with additional childcare responsibilities and financial concerns have led to unfortunate results for some couples.
Recently, I was pleased to contribute to the Medical Post’s Money edition on the importance of having an established financial team to help navigate critical financial events in life, divorce among them. I wanted to share my thoughts on this subject with you here.
The division of assets
Standards of family law apply to physicians and their spouses; this means an equal sharing of assets upon the dissolution of marriage unless otherwise specified (i.e. within a prenuptial agreement).
As they are often faced with divorce from a lower-earning spouse, physicians are usually the party responsible for the child and/or spousal support. With this in mind, there are several considerations to be aware of, including:
- Child support is not deductible by the payer and not included in the recipient’s income.
- Lump-sum payments are not tax-deductible for the provider, yet are not a taxable event for the recipient. This means that this option is better tax-wise for the recipient.
- Ongoing spousal support is deductible to the payer and taxable to the recipient where the parties are living separate and apart because of a breakdown of the relationship. Payment is pursuant to a written agreement or court order.
- If you have an increase in income when paying ongoing child and spousal support, you are expected to share that increase with the recipient. Every year you are obliged to share your notice of assessment (NOA), and depending on the structure of the contract, it may require retroactive payment.
Taking loans from your business for a lump sum payment
Based on the lack of tax incentives and the cost of a loan, making a lump sum payment would not be particularly beneficial. However, if you still wished to do so, there are some important things to consider. As a shareholder of a medical professional corporation, you are allowed to borrow from the said corporation at a CRA-prescribed rate of 1%. The loan must be paid back within the second taxation fiscal year, meaning it can only remain on the books for one annual corporate filing. If, for example, your year-end is August 31, 2020, the maximum time allowed to borrow would be from Sept 1, 2020, until August 30, 2022. If the balance is not paid off in full by the deadline, the outstanding amount is considered as personal income for 2022, and the 1% interest paid to the corporation is considered interest income to that corporation. Assuming the corporation pays 50% tax on this passive income, then your real cost for this loan becomes .50bps. (i.e. if you borrow $100,000 at 1%, you would pay $1,000 back to the corporation. The corporation would then pay $500 in taxes, which leaves a balance of $500).
What should physicians focus on when it comes to post-divorce finances?
Divorce is one of many critical financial events that an individual may be faced with throughout their life. Navigating any of these events is simplified by having an established financial plan, an organized financial life, and a trusted, established team to rely on. Like every critical financial event, divorce needs to be navigated carefully, as there are many considerations. If a physician does not have an established financial plan or team to assist them, now would be an excellent time to establish these resources. With changes to living arrangements and the associated costs, along with revised family income and the potential for child and spousal support, a physician can find themselves navigating various increased costs. It’s important to become clear about changes to cash flow and the impact on one's personal budget, including current lifestyle expenditures and the potential impact on previously established financial goals.
Managing such changes would require a reassessment of priorities, including the potential need for accommodations in order to afford your retirement (i.e. you may need to modify your retirement age and expectations for income/lifestyle during retirement). Other important considerations include adjusting beneficiaries on insurance and investments. You will no longer have the tax-free rollover to a spousal RSP account, and your estate is now responsible for paying the tax liability on that amount. Power of attorney for finances and personal care would also have to be revisited, as would your will and estate strategies. While no one plans for divorce, having a financial plan will generally reduce the angst and uncertainty one could face during one of the most stressful of life events.
Having an established financial plan with a clear sense of your assets, your budget, and which incorporates other considerations such as those named above, can help make a difficult divorce process easier.
Sebastien Chevrier leads Physicians Wealth Advisory, a multi-disciplinary practice offering tailored financial planning and investment services for MDs. If you want to learn more about any or all the areas of your personal finances outlined here, please contact us to start the conversation.