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Difference between revisions of "Property and Debt in Family Law Matters"
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Property and Debt in Family Law Matters (view source)
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==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== | ==Further Reading in this Chapter== | ||