What Are the Tax Implications of a Divorce or Separation on Your Business
You may reach a point where you and your partner are unable to resolve disputes on your own. When that happens, divorce may be the only answer. If you and your partner break up, you will need to divide your assets in accordance with the applicable laws constituting your province.
If you own a business, your most valuable asset is probably your company. This will make the process more complex — from an operational perspective as well as from a valuation and tax standpoint.
You should thoroughly weigh your options before going forward with a plan for the company. It is crucial to think about the approach and timing for dividing the company or its assets. After all, they may have huge long-term tax implications not only for you and your former partner, but your business, too.
If you are in such a tricky situation, read on as your trusted divorce financial planner in Alberta shares some information that you need to understand about this topic:
Defining Spouse and Common-Law Partner for Tax Purposes
When married or living in a common-law union, spouses are treated as one unit for income-tax purposes. They usually share the same tax bracket and the same level of deductions. When the couple separates — whether they divorce or simply move apart — they will no longer be taxed as one unit.
There is not a specific tax-related definition of a spouse. Instead, the Canada Revenue Agency (CRA) uses the term “spouse” in a very general way.
Tax Rules That Need to Be Considered during Divorce or Separation
A rollover occurs when one spouse or common-law partner transfers property to the other spouse after their relationship has ended. The recipient of the property is allowed to keep the property in his or her name free from the issue of any gift tax. As a recipient, however, you will have to pay any applicable capital gains taxes on the property. The rollover only applies to property that is transferred after the couple’s relationship has ended. It does not apply to property which is transferred before the couple’s separation.
Rules on Spousal Attribution
Spousal attribution rules are set in place to prevent spouses from making gift arrangements with each other in order to take advantage of the spousal rollover. These rules are also in place to prevent spouses from transferring assets out of a business and into a tax-deferred pension plan in order to reduce the final tax burden. These rules do not apply in your case because you are not a spouse.
The expanded TOSI rules have made division of family assets more complex. Any income taxed under the TOSI rules is subject to tax at the highest personal marginal tax rates.
However, relieving provisions from TOSI exist in the case of a divorce or separation. One such exemption generally requires that the spouses or common-law partners live separate and apart from each other at the end of the year, because of a breakdown of their marriage or common-law partnership.
While this exclusion is available in many circumstances where a couple has separated but not yet divorced, a deeper analysis of your particular situation is needed to determine whether this exemption is applicable to you.
Careful planning is necessary to ensure TOSI will not negatively affect your division of asset calculations negatively.
Capital Gains Exemption
Normally, when a corporation buys your shares and those shares qualify for the capital gains exemption, you will have a capital gain. You can claim your lifetime capital gains exemption. However, when the purchasing corporation is non-arm’s length and the proceeds are over the paid-up shares capital, the amount in excess could be deemed a dividend instead of a capital gain.
Spouses are non-arm’s length, as are the companies they control. In some cases, even after the finalization of a divorce or the end of a common-law relationship, some former partners are still considered at non-arm’s length. This depends on the facts. This can have serious tax implications in circumstances where a corporation controlled by one former partner purchases shares in another company controlled by the other, as this can be a part of a strategy for division-of-assets.
Divorce and separation can be stressful for both individuals and for their businesses. Tax considerations should not be overlooked during the property division process.
At the end of the day, we want you to be as informed as possible about the process and the costs you should expect to incur along the way. If you are faced with a similar situation, contact a divorce financial planner in Alberta to help you with the daunting task of dividing your assets.
Alberta Divorce Finances offers the reliable services of an experienced divorce financial planner in Alberta. If you need help navigating your divorce because of your business or other complex matters Alberta Divorce Finances can help you. Get in touch with us so we can set up a consultation!