As unappealing as the thought may be, roughly half of Canadian marriages end in divorce.
It is inevitable, then, that divorce and its associated financial unbundling of family assets have serious tax consequences.
Obviously, no one enters a relationship with the plan to break up, but prudence suggests consideration be given to a written marriage contract or pre-nuptial agreement before walking down the aisle.
Some very famous and wealthy individuals, such as Beatle Paul McCartney and singer-songwriter Don McLean (who performed the song American Pie), are a testament to what happens without a pre-nuptial agreement.
Read Also
Farming Smarter receives financial boost from Alberta government for potato research
Farming Smarter near Lethbridge got a boost to its research equipment, thanks to the Alberta government’s increase in funding for research associations.
The disposition of your Registered Retirement Savings Plans are a prime example of just how messy the tax consequences of a divorce can get.
While married, your spouse was likely the beneficiary of your RRSPs. When you die, there are generally no tax consequences transferring the RRSP to your spouse.
You may name your children as the beneficiaries to your RRSP after a divorce, but they are now 100 percent taxable.
This tax bite can be mitigated by making the same children the beneficiary of any life insurance policies you may have.
If you don’t have life insurance, taking one out might be worth considering at this time. Life insurance proceeds are paid out tax-free.
Your accountant and lawyer will obviously be key resources in helping you split the assets with the goal of tax minimization.
Let’s look at an example of a divorcing couple with two major assets — a home and RRSPs. One spouse agrees to own the principle residence (say $300,000 in value) and the other spouse agrees to take ownership of the RRSPs ($300,000).
It seems equitable on the surface, but an RRSP is taxed when it is collapsed. The value is not $300,000. Instead, it is $300,000 less the original owner’s tax rate.
With a tax rate of 45 percent, the value of a $300,000 RRSP is actually $165,000.
The tax rules say that both spouses in a divorce are now transacting at arm’s length, and everything happens at fair market value.
If the family farm is involved in a divorce settlement, it can be challenging to determine a fair market value and “buy out” the former spouse with other assets that would not affect the operation of the farm.
If the farm is a family farm corporation, then the shareholder agreement instructions for determining the process of splitting up the shares become critical.
More and more people after a divorce or death of a first spouse are finding new partners and are remarrying or living common law.
If the first marriage was a time to consider the consequences of splitting up, then remarrying is also a time to tax plan.
Setting up marriage contracts, pre-nuptial agreements and wills that protect the children’s claims on the estate are becoming more common than in one’s first marriage.
It is always advisable to plan early with the assistance of an accounting or tax specialist.
