An Open System
During a separation it is easy to think that you and your ex are the only participants. There are two of you in the relationship and it is your relationship that is breaking down. It is a closed binary system: Me versus them, I win, they lose or vice versa. Every dollar they pay, I keep. That makes sense right?
The Other Parties in a Family Dispute
In most separations, there are other interested parties. Who are they?
- Your children;
- Your friends and family.
Other parties who are not immediately apparent, but who are involved are:
- The Canada Revenue Agency;
- Your bank (especially if you have a mortgage);
- Your employer;
- Your lawyers and other professionals.
Yes, the focus is on the two of you, you and your ex. The two of you are the primary decision-makers, however, other parties will impact and be impacted by your separation. Why is this important? Thinking about the other parties helps you consider what courses of action to take.
What Are Your Objectives?
If your objectives are:
- For both of you to maintain a good relationship with your children; and
- To maximize your individual financial outcomes
Then we would suggest a Win/Win approach.
It Pays to be Collaborative
A Simple Example
In Family Law, both parties are entitled to financial disclosure and 50% of the assets that accrued during the relationship. Consider a situation where parties have accrued between $90,000 and $110,000 in assets – we are not certain of the specific value – which is not uncommon, but is clear that in the worst case the parties have $90,000 in joint assets and in the best case they have $110,000 in joint assets. In other words – a reasonable best-case scenario for each party is between $45,000-$55,000 (remember 50% is a win).
A Family-First Approach
If the parties trust each other and are focused on working together, they can achieve close to this optimum approach. They might each meet with a lawyer, learn the range of reasonable outcomes for each of them, and come to a consensus. In this situation, most of the assets are kept for family purposes. If there was a 50/50 division, then using the above range each party receives between $45,000 – $55,000 (minus the initial lawyer consultation for each of them).
A “Me-First” Approach
If the parties do not work together and do not trust each other, one party can make it difficult for the matter to progress. They might force the other party to:
- Bring an application for financial disclosure;
- Obtain a valuation on any assets that the parties cannot agree on; and
- Bring an application for the Court to divide the assets.
For argument’s sake, assume each step costs the Applicant $5,000 and the Respondent $5,000. ($5,000 per step would be low compared to the actual cost). This means each step costs the family as a whole $10,000.
Both parties are drawing from the same pool of assets and the above steps cost $30,000, so instead of dividing assets worth $90,000 – $110,000, they are now dividing assets worth $60,000 – $80,000. If each party gets 50% of the remainder (which is the anticipated result) they receive between $30,000 – $40,000.
The I Win/You Lose, approach results in less money for everyone – well, except the lawyers.
By taking a step back, the parties in the first example were able to work together to keep more money in the family pot – ½ of a larger pot works out better for both parties.
Parties can also benefit by collaborating when the Canada Revenue Agency is involved.
Separating parties are often in two different tax brackets. If the parties work together, then there are ways to get pre-tax income into the lower tax bracket. Some examples? Spousal Support and RRSPs. The less tax the parties pay, the more money there is for the family.
Consider one party has an income of $200,000 and the other party has an income of $50,000. In 2020, the combined marginal tax rate in Alberta for an income at $200,000 is 42.22%, and at $50,000 it is 30.5% – an 11.72% difference.
What does this mean for the family unit? They keep about 10% more of every pre-tax dollar that they can transfer to the lower-income earner’s hands. The effect is more pronounced the larger the difference in their incomes.
But wouldn’t the Courts order the most tax-efficient solution?
The Court would be focused on the merits of an application. For example, the Court would consider the merits of the spousal support application, not the most tax-efficient overall outcome for the parties.
There are often options available to parties working together collaboratively, that are not available if they go to Court. In a collaborative process, each party can make concessions, or give up rights that a Court cannot force them to.
Sure, there may be exceptional situations when you agree to disagree, or when you need third-party help to reach a decision. With good planning, these cases are rare. Be firm but fair. Assertive, not aggressive. It will work out better for both of you.
HMC Lawyers are committed to protecting your rights. If you have recently separated from your common-law partner, speak to one of our family lawyers about the division of your property to ensure that you are properly protected. Call 1-800-480-3534 or contact us online to make an appointment. We represent clients primarily in Calgary and surrounding areas.