Patricia Lalonde is an Independent Financial Advisor with thirty years of experience in finance, business and banking. She has an extensive experience advising individuals on managing their personal financial matters, thanks to which she has gained detailed insight into their decisions and feelings about money. She leverages the benefit of those years of experience to her clients, specializing in helping people as they go through life’s transitions.
Patricia holds a Certified Financial Planners designation from the Canadian Institute of Financial Planners and is a member of the Financial Planners Standards Council. She is a qualified Mediator with the BC Law Society and is a member of the Collaborative Law Society as well as the International Association of Collaborative Professionals.
Beware of your Ex spouse’s tax liabilities!
You can be liable for taxes owed by your spouse IF you received property from that spouse for less than fair market value prior to separation.
If you have received assets at less than fair market value while you were together, be sure that as part of your separation agreement your spouse certifies that they have no outstanding taxes payable. Also have it state that if there is an assessment of taxes for prior years, they will indemnify you if you are required to pay.
This liability does not apply on account of property which is transferred pursuant to a court order or written agreement, and provided that you were living apart when the property was transferred.
Consider Tax Liabilities
When dividing the family assets, make sure that you account for the tax liabilities. For example, if you have investments that equal the equity in your family home, it probably isn’t an equal division if one person takes the home and the other takes the investments. Remember that the growth in value of the home is never taxed. However, the investment could have a significant unrealized capital gain. That means that when any or all of the investment is sold, maybe for another home, the growth on the investment will be taxed and you will have less than you expected. Ask your financial planner or a tax specialist to determine the after tax value of each of your assets.
Checklist of financial issues on separation
Separation is an emotional life event and it’s important to remember to take care of your financial matters. The following checklist will help you to remember the important items to start with.
- Property ownership. Separate any investments or bank accounts which are in joint names into individual names.
- Payments. Consider whether any payments made in favour of your spouse should be discontinued. For example, contributions made to a Spousal RRSP.
- Credit cards. You may want to advise your banks that you will not be liable for any more charges made by your spouse after the date of separation. Close all joint lines of credit and open separate ones. If your partner is a secondary card holder on any credit cards you might want to close those and open new ones in your name. Is it possible that any children would use your card under instruction from your spouse?
- Canada Child Tax Benefits. If your children are living with you, be sure to make an election as soon as possible to have the benefit calculated on your income only.
- Social Assistance Payments. If you are a low income earner, you should inform the CRA (Canada Revenue Agency) when you have been separated for more than 90 days, because you may become entitled to receive more in social assistance.
- Future Plans. Ending a relationship is a major life transition. It can have a big impact on your plans for retirement and future goals. Be sure to discuss this new situation with your financial planner to help create a new plan for you. Your financial planner can also help you steer away from possibly devastating financial decisions at a time when emotions can cloud ones logic.
Trigger Capital Gains?
Generally assets can be transferred between spouses without triggering capital gains. However, it might be a good idea from a tax perspective to trigger the capital gains as part of the property settlement agreement. If the person who is transferring the assets has any unused capital losses or unused capital gains related to a small business corporation or qualified farm property he or she might not be opposed to triggering the gain on transfer. This would result in a transfer at fair market value and a lower tax bill for the recipient spouse when the asset is sold at a later date.
If a spouse agrees to trigger the capital gain on the transfer, then an election must be made specifically to transfer the property at fair market value. The election can only be made on the whole transfer, not a portion of it. However you can choose to trigger the capital gain on some assets and not on others. If triggering the capital gains will cost only minimal tax to the transferor, this could be very helpful in the negotiations because the recipient spouse will have a higher after-tax value.
Remember that a common-law partner is only considered a spouse for 90 days after the time of separation, so any elections have to be made before that time. Otherwise the transfer can be elected subject to a written separation agreement.
What about Capital Losses?
When transferring a property which is in a loss position, the spouse who is doing the transfer will probably prefer to transfer the property at fair market value in order to trigger the loss. This loss can be offset against capital gains on other properties in the future or carried back against losses in the past. Be sure that when the transfer is done, you are divorced or if you were common-law, you were separated for 90 days. Otherwise the loss will be considered “superficial” and disallowed.