PROPERTY TRANSFERS DURRING SEPARATION

Summary

When a marriage breaks down, there is usually a transfer of property as part of a separation or divorce agreement. The timing and form of the transfer can have unintended tax consequences. Proper tax planning before the separation agreement or divorce settlement is finalized can defer or avoid payment of income taxes.

Article

When married, spouses are able to transfer property between themselves at the Adjusted Cost Base (ACB), not Fair Market Value (FMV). This means that when a property that has increased in value is transferred from one spouse to another, the first spouse does not have to recognize the gain in value (and pay tax on the gain) at the time the property is transferred. However, as long as the spouses are still married, the spouse who originally owned the property has to recognize and pay tax on the gain on the sale when the property is disposed of. This is part of the attribution rules contained in Section 74.2 of the Income Tax Act.

Similarly, there are attribution rules in Section 74.1 of the Act that require the first spouse, who originally owned the property to report any income from the property on their tax return when it is received by the second spouse while married. This is intended to stop spousal income splitting where the spouse in a lower tax bracket reports income and pays tax at a lower rate.

When property is transferred between spouses on marriage breakdown, the separating spouses can elect to avoid the attribution rules for capital gains on a property by property basis. If both spouses agree, the new owner of the property will pay tax on a capital gain on the property when it is sold, instead of the spouse who originally owned the property. The attribution rules for income earned by a property cease to apply after the marriage breakdown, so no agreement is needed in this regard.

As long as the property transfer occurs before the marriage breakdown, or pursuant to a legal separation or divorce agreement, the property can transfer at the ACB, with no immediate capital gain. However, unless the election is made by both spouses, when the property is eventually sold the spouse who originally owned the property will have to pay tax on any capital gain. Alternatively, it may be of some advantage to transfer certain properties at Fair Market Value.

In addition, if the property is transferred after the marriage breakdown, an immediate capital gain will be triggered unless there the transfer is specifically made in settlement of rights arising out of the spouse’s marriage.

In addition to a lawyer, a tax accountant can also be needed when discussing divorce settlements and property transfers on marriage breakdown.

Article supplied by
Mark Allan, CGA, CFE
J. A. SMITH & ASSOCIATES INC.
2147 Bowen Road
Nanaimo, British Columbia Canada
V9S 1H8

For more information on information on this topic contact Mark Allen by Phone at 1-800-343-6133. Or, you can email him at mark@jasmith.com.

The above article is meant for information purposes only and is not advice given by DADS101.com. If you believe that this information applies to you, DADS101.com strongly urges you to check with a financial professional regarding your situation.

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