Question: Could there be two more exhilarating topics covered in one article?

Answer:

1. I am a lawyer, obviously “it depends”;
2. Hold my beer... Have you heard my story about Justin Bieber and the rule against perpetuities?;
3. No, there could not. I challenge even the most senior lawyer in the province to answer this in the negative, while maintaining a straight face; or
4. I am no longer reading this based on the title alone.

In most family law matters, it is prudent to get tax advice. When dealing with family law matters that have corporate interests or complex assets, it is further advisable to get guidance from both a tax lawyer and an accountant. As case law is developing and there are regular updates to the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.) (the “ITA”), it is important to get updated advice for each file. This article provides a brief and general overview of some tax matters that are helpful to be aware of when addressing family law scenarios.

Property and Debt Division

In a separation, spouses can roll over funds from one party’s RRSP/RRIF to the other’s pursuant to a court order or written agreement without triggering taxes. A T2220 Form will need to be completed.

A transfer of real property to a spouse or former spouse under a written separation agreement or court order qualifies for a Property Transfer Tax exemption (code 15).

Until there is a written separation agreement or court order for property division, the Canada Revenue Agency requires the spouses to designate the same property as their principal residence for the year. This is important to consider in property division agreements so that claims are consistent.

Under the Family Law Act, S.B.C. 2011, c. 25 (the “FLA”), tax debts are considered family debt and tax refunds are considered family property.

Distributive taxes (such as latent capital gains taxes and distributive taxes) will be considered in the valuation of assets under the FLA. It is very important to consider the difference between tax neutral and tax latent assets in determining the value of property for division.

Upon separation, spouses generally qualify for tax-deferred treatment of the transfer of capital property, unless the transferor elects to waive it under clause 73(1) of the ITA.

Child and Spousal Support

Periodic spousal support is taxable as income to the recipient and tax-deductible to the payor. This requires a written agreement or court order to be in place.

Lump sum spousal support does not attract the same taxable status, so it is important to take into consideration the tax implications of making a lump sum payment vs. a periodic payment. A qualifying retroactive lump-sum payment is tax deductible for the payor in the year it was paid (see form T1 198 for details).

Tax planning for income tax purposes is not effective income planning for support purposes. The FLA and the Divorce Act provide for “piercing the corporate veil” and, when calculating income, will include pre-tax corporate income, an adjustment for preferential tax rates (i.e., dividends) and expenses written off in a company or business that have a personal benefit to the payor.

Many childcare expenses are divisible by separated parents in proportion to their respective incomes pursuant to Section 7 of the Federal Child Support Guidelines (SOR/97-175) (the “CSG”). When dividing these expenses, they should be divided net of the tax benefit received by the parent paying the expenses (CSG Section 7(3)).

Legal fees incurred to obtain or increase support may be deductible for income tax purposes (by the person who is receiving the support) (see Loewig v. Canada, 2006 TCC 476).