Family Apart by jermainedayvis


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Chartered Accountants & Business Advisors                                               OCTOBER 2004


 In today’s society, the dynamics of a family unit certainly has a much different look than in years gone
 past and there is a growing trend of failures in family relationships and eventual dissolutions. Our
 income tax laws associated with such break-up situations have become increasingly more difficult to
 interpret and are sometimes overlooked when formal legal settlements are reached between the parties.
 Obviously, this is an extremely emotional time for all parties involved in this process. Conflicts often
 arise between the application of the income tax rules and the intent of the parties in reaching their
 mutual agreement. And it appears there is not always uniformity in how our trial judges view the
 income tax rules in reaching their decisions. The purpose of this paper is to provide a general review
 of some of the important income tax rules as they apply to “the family apart”.


 Beginning May 1, 1997, new child support agreements (and sometimes “older” agreements) will be
 subject to a general rule which provides that the payor of the child support amounts gets no tax relief
 for the payments made, and the recipient receives the funds on a “tax free” basis. The actual quantum
 of the support amounts are determined essentially by formulas established in federal child support

 The aforementioned income tax treatment is completely the reverse of the rules which applied before
 May 1, 1997. The old rules allowed a deduction to the payor and an income inclusion to the recipient.
 These old rules continue to apply today to most “unaltered” agreements reached prior to May 1, 1997.


 Assuming that certain guidelines as outlined below are met, the income tax treatment of support
 amounts (previously referred to as alimony and maintenance payments) are considered as taxable
 income to the recipient and a tax deduction to the payor.

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The specific guidelines to qualify for the aforementioned tax treatment are:

•   The payments must be payable as an allowance on a periodic basis.
•   The payments must be for the maintenance of the spouse.
•   The spouse must have discretion as to the use of the support amounts.
•   The spouses must be living separate and apart because of a breakdown in their relationship.
•   The support amounts must be paid pursuant to either a written agreement or an order issued by a competent

Any lump sum payment in lieu of periodic payments will not meet the guidelines and would therefore be
treated simply as a transfer of capital between the parties.


Generally speaking, the Income Tax Act provides for the transfer of capital property between spouses on what
is often referred to as a “rollover basis”. Accordingly, any inherent capital gains (or losses) and recapt ure of
tax depreciation does not have to be recognized at the time of the transfer between spouses. It is possible to
“elect ou t” of these rollover rules if both parties agree and file their income tax returns accordingly. Any
property transfers between spouses contemplated as part of the settlement of marital rights arising under
provincial family property equalization qualify for these tax deferred transfer rules. It is imperative for both
parties to understand which party will bear the future income tax burden when these properties are sold or
otherwise subject to any deemed disposition rules. Additionally, the income attribution rules contained in our
tax legislation should be reviewed to avoid any unpleasant surprises.

Other properties which can be transferred between spouses without immediate income tax consequences

•   Transfers from one spouse’s registered retirement savings plan (RRSP) or registered retirement income
    fund (RRIF) directly to the other spouse’s RRSP or RRIF.
•   Equalization between spouses of Canada Pension Plan retirement benefit rights which have accrued during
    the time of their relationship. An application on divorce must be made to effect this equalization.


Change is inevitable and constant. Keeping abreast of change, as it affects the lives of our clients and their
families is our commitment to quality service. We look forward to discussing any issues or planning
opportunities in this regard.

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