Seven Tips for Separating Assets on Relationship Breakdown

Couples feuding? If it ends in separation or divorce, there are tax strategies you can use that are critical in minimizing the financial damage that can occur in these cases. Here are seven tips for separating in a tax-efficient way.

Income attribution. The rules that prohibit income splitting between couples and when there is a separation, providing that the couple continues to live apart after 90 days of separation. Therefore, the new owner of the property after a relationship breakdown is responsible for all tax consequences on the earnings and capital appreciation (or depreciation) of the property. The cost at which the assets are transferred is also important, because it determines what numbers you will use to calculate future gains and losses from taxable investments or income from registered investments, as described below.

Spousal RRSPs. Normally, withdrawals from spousal or common-law partner RRSPs made by the annuitant are reportable by the contributing spouse if any RRSP contribution has been made in the current year or the previous two years. However, this rule is waived for separated/divorced couples and withdrawals from existing spousal RRSPs are reportable by the annuitant. Furthermore, spousal RRSP contributions will no longer be allowed after the divorce or separation.

RRSP Accumulations. Funds that have accumulated in RRSPs before the relationship breakdown may be rolled over on a tax-free basis to the ex-spouse when the parties are living apart and if the payments follow a written separation agreement, court order, decree or judgment. The transfer must be made directly between the RRSP plans of the two spouses and one spouse cannot be disqualified because of age (over age 71) although the funds may be transferred from the RRSP to the spouse’s RRIF in that case. The same rules for tax-free transfer of funds apply to RRIF accumulations. Form T2220 is used to authorize the transfers between the plans.

TFSA Accumulations. These can also be split on a tax-free basis if the funds form part of the separation/divorce agreement. The funds from one party’s TFSA may be transferred tax free to the other party’s TFSA. This will have no effect on the contribution room of either of the parties.

Principal Residence. After separation, CRA recognizes two family units, and therefore it is possible for each to own their own tax-exempt principal residence.

Other Property. The transfer of depreciable property (that is, upon which Capital Cost Allowance can be claimed) takes place at the undepreciated capital cost of the property. As a result, no recapture, terminal loss, or capital gain takes place on the transfer.

For other capital property, the transfer takes place at the adjusted cost base of the assets, so again, there is a tax-free rollover.

There are many other implications when it comes to claiming deductions and credits on the tax return. The bottom line? Separation and divorce are expensive and complicated. Filing a tax return to the best benefit of the family unit is harder, too. Make sure you minimize the financial impact by consulting with a tax and financial professional to get the best after-tax results in a difficult circumstance.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

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