A few tax considerations.
Before you divide up your assets
Unfairness as a result of distributing taxable assets.
The bottom-line about tax consequences.
A few tax considerations.
For many people, there will be no tax impact from the division of their assets.
For others, the tax implications will be significant.
Essentially, there will be a tax impact if the division creates what the
Canada Customs and Revenue Agency (the CCRA) considers to be "income" for
either spouse.
The most common kind of taxable income people have is employment income. Some
other kinds of taxable income include:
-
Money you receive when you cash in an RRSP.
-
Money you receive from the sale of real property, when the property has
increased in value.
-
Money received by a shareholder from the company as a dividend.
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Money received by a shareholder from the sale of the company; or,
-
Interest you get from a loan you've made to someone else.
Income may be taxable at different rates, depending upon how it is earned by
the taxpayer. The goal is to pay only what is necessary, and to avoid paying
unnecessary taxes.
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Before you divide up your assets
Before you divide up your assets, find out what the tax impact will be. You may
find that you can achieve what you want, without triggering tax consequences.
Here are a few examples:
RRSPS
One of you may have significant RRSP holdings, which you might to split with
your spouse. If you cash out the RRSP, you must pay tax on the RRSP as if the
RRSP was taxable income, like employment income. However, with some simple tax
planning you can avoid having to pay these taxes.
Under the federal Income Tax Act, transfers of RRSP's between spouses are tax
neutral, under what is called the "tax-free spousal roll-over" provisions. When
RRSP's are transferred between spouses according to a separation agreement or
court Order, they do not have to be cashed out. No tax is payable until your
spouse decides to cash the RRSP.
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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. Much like the RRSP information above, this
can result in a tax-free transfer of real property to your spouse.
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Unfairness as a result of distributing taxable
assets.
There is a possibility that there may be some tax implications in the way
family assets are divided, which results in an unfair distribution of assets.
Here is a simple example:
Two spouses decide to separate. They have $50,000.00 cash, and they have
stocks, which are also worth $50,000.00. The stocks have appreciated $20,000.00
since they were purchased. The spouses want to divide their family assets
equally, and they propose that one will keep the cash, and the other will keep
the stocks. Is this fair?
At first glance, it appears that each spouse will receive $50,000.00 in family
assets. However when the spouse who receives the stocks sells them, the
increase in the value of the stock will be subject to taxation. If the stocks
are sold for $50,000.00, the net distribution to the spouse who sold them will
be $50,000.00 minus the tax, which must be paid on the increase in the value of
the stock. In other words, the tax consequence of the sale of the stocks will
result in an unequal distribution of family assets. That is not what the
spouses intended, and it will probably leave a bitter taste in the mouth of the
spouse who sold the stocks.
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The bottom-line about tax consequences.
Before you dispose of property, divide your property, start making payments to
your spouse or partner, you should be aware of any tax consequences that you
may trigger. It doesn't make sense to pay more tax than you have to, and you
may as well take advantage of any tax relief you are entitled to.
For instance if you are going to pay spousal support, you are going to want
those payments to be pursuant to an Order or a proper agreement, which will
ensure that you can deduct these payments from your income. But in order for
these payments to be tax deductible, you will have to set up your affairs
properly.
This is a complex area of family law, and tax laws change frequently. You
should review your individual circumstances with an experienced Family Law
lawyer. Organizing the distribution of your property in a proper manner could
save you thousands of dollars in unnecessary tax payments.
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