When legally dividing your assets during a separation or divorce, you and your partner may have significant tax implications. Tax implications are even higher if you own a business. At Verhaeghe Law – we have helped thousands of individuals with disputes resulting from divorces and have provided guidance on tax related matters through tax experts on how to minimize tax implications. Each legal situation is different so we recommend you hire an Alberta divorce lawyer to go over your options prior to commencing your separation/divorce process.
Tax implications of separation or divorce for a business owner
If you are a business owner and your business becomes a contentious point in the middle of a divorce – this can be or turn into a highly contentious issue for you. As such, many business owners take legal precautions to safeguard their business by having a prenuptial agreement in place before the marriage to safeguard their business. A well-drafted prenuptial agreement is one way to avoid complexities arising from a divorce and the tax implications associated with it.
As a business owner going through a divorce it is essential that you consult a tax expert in conjunction with a lawyer especially when division of assets are involved. Your lawyer may be able to suggest a tax expert or tax consultant. As with any other legal scenario, the tax implications are unique to your circumstances.
Business owners must be aware of three tax areas involving division assets during a divorce:
- Spousal rollover: This refers to the transfer of assets between non-arms-length parties deemed to occur at fair market value. This means regardless of the price the assets were sold for, you may be on the hook for capital gains tax based on the value. However, assets transferred between spouses and common law partners may be considered spousal rollover and may be transferred at cost. When a relationship breaks down and, in most cases,, you are eligible to transfer on a rollover basis provided the transfer results from a settlement. If this process is not followed the roll-over rule may not apply and you may be assessed a higher capital gains tax.
- Spousal attribution: Spousal attribution rules can make a transferor be held liable for the taxes tied to the income or gains from that property, when the transfer occurs as a gift. For example, if your spouse received C$200,000 in stocks as a gift from you, your spouse is legally entitled to keep the dividends, but the dividends can be taxed on your tax return. This spousal attribution ends only on the legal termination of your marriage or common law relationship. There are expanded attribution rules that may apply and you are advised to seek advice from a tax professional for your specific situation.
- Capital gains exemption: Canadians are entitled to a lifetime capital gains exemption limit and you can claim this exemption when a corporation buys your assets. However, if the proceeds of the transaction exceed the value of the capital of the shares in a non-arm’s length transaction, the excess can be deemed a dividend and not a capital gain. Depending on the facts of the case the interpretation of non-arm’s length and arm’s length can change and have significant tax implications for the partners. A strategy to divide the assets is essential for divorcing partners who have sizable business ownership or assets. Lack of a strategy can have unexpected tax implication for both partners.
Hire a Divorce Lawyer and Tax Consultant/Lawyer Together
One other way of managing a division of a business through a divorce is by splitting the assets of business into two corporations. One owned by each partner, avoiding income taxes altogether. This is called a butterfly transaction. There are two different methodologies for this transaction based on your personal situation and a divorce lawyer and tax consultant can assist you with this and give you legal and sound tax advice accordingly.
There may be many legal options available to you with respect to dividing your business or assets during a divorce or ending a common law relationship. This blog covers some of the many options available to divide a couple’s assets however there are many more legal options available to you if you are faced in this situation.
Our Alberta family lawyers at Verhaeghe Law Office our divorce lawyers have helped thousands of people across Alberta with their divorces. To better discuss how we can assist with your legal needs please contact our law firm today by calling 587-410-2500 and speak directly with one of our divorce lawyers.
Note: This blog offers general information for your convenience and does not constitute legal advice. Family law can be complex and you’re encouraged to seek legal advice to better understand your rights and responsibilities as well as the rights of your children.
