Dividing Assets on Separation or Divorce

Christine Steendam

Last week, we covered *Divorce: Minimizing Set-Back Through Tax Efficiency. However, there is another piece to the financial puzzle that divorce introduces: division of assets. This article will explore the division of common assets upon divorce; a process legal, tax and financial advisors will want to be up-to-speed.

Assets referred to as “marital assets” will have to be split between the partners. However, what qualifies as a “marital asset” depends on the province and, in some provinces, the nature of the relationship (married or common-law) will also be a factor. In most cases, assets owned prior to the marriage and assets received by gift or inheritance will not be considered marital assets. In some provinces, a spousal agreement may allow some assets that would otherwise be considered to be “marital assets” not to be.

Assets that need to be divided can include non-financial assets such as real property and business assets, as well as the division and transfer of investments in registered and non-registered accounts. In most cases, divorced or separated spouses are able to transfer assets between the two of them on a “rollover” basis – that is, without a tax hit. Here is how that works:

• Capital property (most assets) can be transferred at adjusted cost base (ACB) so that the recipient spouse inherits the current ACB of the property, and there’s no tax to pay on the transfer. However, fair market value may be chosen in some cases to offset capital loss balances. That’s a more complicated scenario, where estimated tax outcomes should be calculated for the current and future tax years. There may also be some loss carry-back provisions that could create a tax refund in the hands of one of the spouses. The recipient spouse would receive a bumped-up cost base, however.
• Registered Retirement Savings Plan (RRSP) and Retirement Income Fund (RIF) assets can be transferred directly to the other spouse’s RRSP or RIF without a tax hit.
• CPP entitlements earned while the couple was together can be split between the spouses.
• Apply to Service Canada for a split of CPP entitlements using Form ISP1901.
• Registered Pension Plan (RPP) entitlements earned while the couple were together may be split between them. If the pension is already being paid, the pension payments will be split, and each spouse is taxed on the amounts they receive. If the pension has not started, the result may be a pay-out from the pension plan to the second spouse. This payout would be taxable unless transferred to a locked-in RSP or to another RPP.
• Tax-Free Savings Account (TFSA) can be rolled over tax-free and there are no income tax consequences to either spouse.
• Matrimonial Home The rules for the matrimonial home differ from province to province, but in general, it is an asset for which values must be split equally.

2019 Changes to the Home Buyers’ Plan (HBP). The March 2019 Federal Budget introduced changes to the Home Buyers’ Plan that allows couples who suffer a relationship breakdown to participate in the Home Buyers Plan’ as individuals even if they don’t otherwise qualify as a first-time buyer.

To qualify, the taxpayer must be living apart from their former spouse or common-law partner at the time of the withdrawal and the separation began in the current or four preceding years. In addition, the taxpayer may not make a withdrawal if they move into a home owned and occupied by a new spouse or common-law partner.

The HBP may be used to buy out the share of the residence owned by the former spouse or common-law partner, however, if it is used to purchase a new house, the former principal residence must be disposed of no later than two years after the HBP withdrawal. Taxpayers who have an existing HBP balance may not make a new HBP plan withdrawal until the former plan withdrawal is repaid.

* Divorce: Minimizing Set-Back Through Tax-Efficiency

Additional educational resources: Study online to become a DFA-Tax Services Specialist™ . Until October 31, you can save $200 on tuition when you enrol in a designation program. And, when you enrol before September 30, you pay no tuition instalment fees (up to an addition $234 in savings).

COPYRIGHT OWNED BY KNOWLEDGE BUREAU INC., 2019.

UNAUTHORIZED REPRODUCTION, IN WHOLE OR IN PART, IS PROHIBITED.