Property and Debt in Family Law Matters

Under the provincial Family Law Act, each spouse is presumed to keep what he or she brought into their relationship and to share in the things they acquire during their relationship. The same rules apply about debt; spouses are presumed to share responsibility for the debts that accumulated during their relationship. The federal Divorce Act doesn't talk about the division of property or debt.

This page provides an introduction to the division of property and debt between spouses and how the property rules of the Family Law Act are different from the "Family Relations Act, the rules about property that apply to couples who are not spouses, and some of the income tax issues that can come up when dividing property. The pages that follow will go into the rules about the division of property and debt in a lot more detail.

Dividing Property and Debt under the Family Law Act

The parts of the Family Law Act about the division of property and debt apply to people who are spouses. The definition of spouse for these parts of the act are a bit different from the rest of the act. For the division of property and debt, a spouse is:

1. someone who is married or was married to someone else; or,
2. someone who is or was living in a "marriage-like relationship" with someone else for at least two years.

People who lived together for less than two years are not spouses for these parts of the Family Law Act, whether they've had a child together or not.

Property and debt can be divided under the terms of a cohabitation agreement or a marriage agreement that the spouses made around the time they began to live together, or under the terms of a separation agreement that they made around the time they separated. If the spouses can't reach an agreement, a court can make an order about the division of property and debt.

Court proceedings for the division of property and debt must be started within two years of:

1. the date of divorce or annulment for married spouses; or,
2. the date of separation for unmarried spouses.

=Family Property, Excluded Property and Family Debt

The Family Law Act talks about three things when it comes to dividing property and debt, family property, excluded property and family debt.

All property owned by either or both spouses at the date of separation is family property. This includes things like real property, bank accounts, pensions, business, debts owing to a spouse and so forth. Family property is presumed to be shared equally between spouses, regardless of their use of or contribution to that property.

Excluded property is any property that is excluded from the pool of family property to be split between spouses. This includes the property a spouse acquired before the date of marriage or the date the spouses began living together, whichever is earlier, plus certain property acquired during the spouses' relationship, including:

1. property bought with the property brought into the relationship;
2. inheritances and gifts; and,
3. some kinds of insurance proceeds and court awards.

Excluded property is presumed to remain the property of the spouse who owns it.

All debt incurred by either or both spouses from the date of marriage or the date the spouses began living together, whichever is earlier, to the date of separation is family debt. Responsibility for family debt is presumed to be shared equally between spouses, regardless of their use of or contribution to that debt.

Beginning and Ending a Spousal Relationship

As you can see, certain dates in a couple's relationship are really important. The date a relationship begins, the earlier of the date the spouses marry or begin to live together, is the date separating the excluded property brought into the relationship from the family property acquired during their relationship and the date when the being to share responsibility for new debts. The date the spouses separate, generally speaking, marks the end of the accumulation of shared property and shared debt.

Becoming Spouses

Under s. 3(3) of the Family Law Act, a relationship between spouses begins

... on the earlier of the following:

(a) the date on which they began to live together in a marriage-like relationship;

(b) the date of their marriage.

Since the definition of spouse at s. 3(1)(b)(i) includes people who have lived together "for a continuous period of at least 2 years", once you have reached the two-year mark, you are a spouse and your relationship as spouses began two years earlier.

Separating

Although a married couple are married until they get a divorce, the key date for the division of property and debt under the Family Law Act is the date of separation.

spouses become, effective as of

tax shit

For many people, there will be no tax impact from the division of their assets. There will be a tax impact if the division creates what the Canada Revenue Agency deems to be "income."

The most common kind of taxable income people have is employment income. Some other kinds of taxable income include:

the money you get when you cash in an RRSP; money received by a shareholder from the company as a dividend or from the sale of his or her shares; the interest you get from a loan you've made to someone else; and, the profit realized from the sale or transfer of real property that isn't the family's principle residence. When you report this sort of income in your tax return, the CRA considers it to be taxable income, income which may be taxable at different rates.

The purpose of this segment is to alert you in a general way to the possibility that there may be tax implications in the way family assets are divided and that there are sometimes ways to avoid this sort of unfairness. This is, however, a complex area of family law, and if you have a problem of this nature, you really should get the advice of a lawyer who specializes in tax issues; store-bought or online tax software will not identify these issues. You probably don't want to pay any more tax than is absolutely necessary!

A. Avoiding Unfairness The tax consequences of a particular arrangement in a court order or separation agreement can be taken into account when property is being divided, since the payment of tax by one party may fundamentally change the fairness of the agreement or order. Consider the following example:

Say Spouse A receives $100,000 in cash and Spouse B receives a rental house worth $100,000, and the cash and the rental house are all of the family assets. At first glance, this seems like a fair, 50-50 split of the family assets, which together come to a total of $200,000. In fact, it isn't. No tax will be payable by Spouse A as a result of receiving the cash. Tax will be payable by Spouse B if the rental house has to be sold, since it wasn't the family's primary residence. If the tax payable on the income Spouse B earns from the sale is $20,000, really, Spouse A has received $100,000 and Spouse B has received $80,000. If you count the tax which Spouse B has to pay, the division of the family assets wasn't equal at all. To make the split equal, Spouse A should pay Spouse B an extra $10,000 so that each spouse will have $90,000 once the rental house is sold. The same problem can arise if one spouse has to sell an asset in order to satisfy an order or agreement for the division of the family assets, such as making a lump-sum payment to equalize the value of the assets held by each party. This may result in the CRA assessing extra of taxable income to the party who had to sell the asset, with the consequence of an additional tax debt owed by that party to the CRA.

There is an easy way to avoid unfair tax consequences and preserve the intention of the agreement or court order: the agreement or order can recognize the negative tax consequences of a particular term and compensate the affected spouse, as in the example involving the house above. If you need to convince a court to take tax considerations into account in dividing assets, there are three general rules you should keep in mind:

each case will depend on the particular circumstances of the parties; you should be able to provide an estimate of the tax which will be payable; and, you must be able to show that the sale or transaction which will result in tax being payable is likely to occur in the reasonably near future. B. RRSPs Normally, if you wish to cash out an RRSP, you must pay tax on the RRSP as if the RRSP was taxable income, like employment income. Under the federal Income Tax Act, transfers of RRSPs between spouses are tax neutral, under what is called the "tax-free spousal roll-over" provisions of the act.

When RRSPs are to be transferred between spouses according to a separation agreement or court order, the RRSPs are simply transferred between the spouses' RRSP accounts without having to cash them out, and no tax is payable.

C. Real Property When a piece of property is to be transferred between spouses according to a separation agreement or court order, the parties should use the province's Special Property Transfer Tax Form, to take advantage of the tax-free status of transfers between spouses made pursuant to family agreements and court orders. This form is normally completed during the process of transferring title to the property at the Land Title and Survey Authority, and no tax will be payable on the transfer.

Further Reading in this Chapter

• bulleted list of other pages in this chapter, linked

Page Resources and Links

Legislation

• bulleted list of linked legislation referred to in page

Family Law Act, Divorce Act, Constutution Act 1867 at least

Links

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