What Every Family Law Lawyer Should Know about Income Tax
| Author | Jonathan L. Richler |
| Pages | 429-449 |
What
Every
Family
Law
Lawyer
Should
Know
about
Income
Tax
Jonathan
L.
Richier*
A.
INTRODUCTION
Income
tax has a
real dollars impact
on
virtually every aspect
of a
fam-
ily
law
matter.
In
fact,
it is the
largest single
factor
that
affects
the
bottom
line.
In
Ontario,
the
difference
to the
payer between
support
payments
being deductible
or not is
about
46
cents
on the
dollar.
So too is the
dif-
ference
to the
recipient between such payments being taxable
or
not.
The
difference
between
a
capital
gain
being
taxable
or not is
about
23
cents
on the
dollar. Family lawyers therefore need
to be
aware,
at
least
at a
basic level,
of how
income
tax
affects
their client's position.
Being
familiar with
a
client's
and
adversary's income
tax
position
can
often
be
useful
in
finding solutions.
Has
either party made
use of his
$500,000
lifetime capital gain exemption? Does either party have capital
or
non-capital loss carryforwards that
can be
accessed?
Is
either party
resident
in a
jurisdiction
in
which support payments
are
non-taxable
(to
Jonathan
L.
Richler, founder
of
Richler
and
Tari,
Tax
Lawyers
in
Toronto.
The
author expresses
his
appreciation
to
Cadesky
and
Associates, Canadian
and
Inter-
national
Tax
Specialists,
for
their assistance
in the
preparation
of
these materials
and for
permitting
the
author
to
adapt certain materials used
by
them
in
their
tax
seminars. Copyright permission
has
been obtained.
The
author also expresses
his
appreciation
to
Aaron Franks
of
Epstein Cole
LLP for his
assistance
in the
section
on
cross-border support payments.
The
author similarly benefited
from
the
useful
and
concise booklet produced
by
Cole
&
Partners,
The Tax
Principles
of
Family
Law
(i3th edition).
429
43°
JONATHAN
L.
RICHLER
the
recipient)
or
deductible
(to the
payer)?
These
and
many other
factors
are
relevant
to the
overall
tax
analysis, which
in
turn
is an
essential
in-
gredient
of
meaningful
settlement negotiations.
In
tax,
as in
life,
timing
is
everything.
If
transactions
are
appropri-
ately timed,
tax
opportunities
can be
availed
and
undesirable
tax
con-
sequences avoided.
If
they
are
not, then
tax
traps
may
spring
up. The
application
of
various rules
in the
Income
Tax
Act' depends
on the
status
of
the
parties
at the
time
of the
transaction and/or whether proper
in-
come
tax
elections have been made.
For
example,
the
"attribution rules"
contained
in ITA
subsections
74.1(1)
and
74.2(1),
which attribute income
and
capital gains
back
to a
transferor
spouse, depend
on
whether
the
parties
are
"spouses"
or
"common-law partners"
at the
time. There
are
other examples.
Good
tax
planning
can
often
produce
beneficial
results.
Difficult
problems
in a
family
breakdown
can be
solved,
or at
least minimized,
by
well-timed
and
effective
planning.
For
example,
a
family
business that
is
owned
by
both spouses can,
in
appropriate circumstances,
be
split
up on
a
tax-deferred
basis
by
means
of a
"butterfly" reorganization pursuant
to ITA
paragraphs
55(3)(a)
and/or (b).
The
analysis contained herein aims
at
highlighting,
in a
very gen-
eral
and
basic way, some
of the
major
income
tax
issues
of
importance
to
family
law
practitioners.
It is by no
means intended
to be
comprehensive
or
detailed.
B.
SPOUSES
AND
COMMON-LAW
PARTNERS
As
stated above,
the
application
of
certain income
tax
rules
often
de-
pends
on
whether
the
parties
are
"spouses"
or
"common-law partners"
for
income
tax
purposes. Accordingly,
one
needs
to
consider
the
mean-
ing of
"spouse"
and
"common-law partner"
in the
ITA.
i)
Spouses
"Spouse"
is not a
defined
term
in the
ITA.
ITA
subsection
252(3)
provides
an
extended meaning
of
"spouse"
and
"former
spouse."
The
2005
same-sex marriage
Bill
changed "another
individual
of the
opposite sex"
to
"another individual
who is a
party
to
a
void
or
voidable marriage with
the
particular individual."
The
amend-
i
R.S.C.
1985,
c. i
(5th Supp.)
[ITA].
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