Tax Traps for Divorcees

If you are getting divorced or separated, part of your separation agreement may require you to transfer some or part of your assets to your former spouse, if this is the case; make sure you consider the tax implications.

When a relationship breaks down, many people are under the misconception that attribution rules automatically stop; but they don’t.  Attribution rules are a special set of tax rules that will tax income and gains to one spouse even though the other spouse receives the income. 

In the case of capital gains, while attribution automatically ceases for divorced couples, it does not stop when parties are only separated; not yet divorced or were never married.

So for example; if John and Suzan are getting divorced, and John transfers his non-registered mutual fund portfolio to Suzan in compliance with their separation agreement and Suzan subsequently sells the portfolio for a capital gain, the attribution rules will apply and create a tax liability for John, even though the couple is separated.

In this kind of situation, you can take certain measures to ensure that attribution will not apply on the capital gain, you must:

·        Live separate and apart by reason of marriage breakdown (and not resume cohabitation during the year), and

·        File a joint election (under subsection 74.5(3)(b)) where you agree not to have attribution apply on capital gains triggered on the sale of transferred property.

 You can file this joint election by attaching a note to the tax return of the transferring spouse.  Both of you must sign it.  Without doing this, any capital gain resulting from the sale of transferred assets will be attributed back to the transferring spouse, provided you are not yet divorced.

However in the case of income (interest, dividend, rents, royalties), the attribution rules cease automatically upon the relationship breakdown.  So, if both parties remain separated throughout the year, and property has been transferred in compliance with a written agreement, any income generated from the property will automatically be taxed in the recipient spouses’ hands.

When major events happen in your life you must always consider the financial implications.  Whether it is getting married, divorced or having a baby, always stay properly informed.  If you have any questions, please don’t hesitate to give me a call.

Have a great weekend,

Tracey

 

 

Source:  original article published on advisor.ca by Frank Di Pietro, 05-29-13