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My question is: Canadian-specific
QUESTION: I am at the final point of signing the negotiated terms of the
division of assets through my divorce. This question is related to two
properties. I currently (rent)reside in Vancouver BC and I lived in Alberta
up to April 2004. I shared a primary residence in Alberta with my husband
that was purchased by him before our marriage and remains entirely in his
name. We have a rental investment property in Alberta in both our names.
Husband is keeping the rental property resulting in my share of the asset
and a taxable rate of 34%. Am I better off claiming this in BC as part of my
income? My salary was less when I lived (a student) in Alberta and property
value is set at April 2004. I am receiving a portion of the primary
residence's equity from the time I lived in the home which is considered
already taxed. Are there any other deductions related to divorce I can claim
that would offset the capital gains tax on the investment property?
Any advice you can give would be great! Thanks.
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david ingram replies:
You have a deemed disposition of your share of the investment property and
it sounds like your lawyer and yourself either decided to accept the tax
consequences or were negotiated out of the tax free possibilities or your
lawyer did not understand the consequences which is what I see all too
often.
The real problem in these situations is that if you figure in the "after
tax" value of assets, the judge does not take them into consideration. They
always seem to look at before tax dollars. I was recently involved in one
of these involving a $4,000,000 house and $10,000,000 worth of investment
property. The HOUSE was NOT tax free because the owner was an American and
taxable on $3,400,000 on its sale. Another US / Canadian tax consultant and
I were retained to calculate the tax liabilities. The lawyers and judge had
no interest in the situation. I found it a total miscarriage of justice but
I have watched it for 42 years now.
You could have negotiated the deal so that your ex-spouse assumed your share
at the cost price, meaning he would pay the tax on his sale sometime in the
future. This is what usually happens because paying the tax in the future
rather than now is the quintessential basis of good tax planning.
--------------
However, you do not have a choice about where to report it.
You should report it for the day that the deal was made and contrary to
popular belief, that does NOT mean the day you signed the papers. It means
the day you agreed to the deal whether in an office, a courtroom or over a
cell phone while in a hot tub (the preferable method if you are in the hot
tub with a new friend).
So, if you were living in Alberta on Dec 31st the year you made the
decision, you would file it as part of that year's tax return and it would
become part of your Alberta Tax return.
But if you signed the paperwork in Alberta on Jan 2, 2005 but moved to BC on
Dec 30th, technically, you owe the tax to BC because we tax most of your
income based upon the province of residence on Dec 31st.
The same would apply if you had worked in Alberta from Jan to Nov and moved
to BC in Dec. You would pay tax to Canada and BC and Alberta would get zip.
There is an exception which does not apply to your situation. Believe it or
not, An American resident who flies as a pilot or flight attendant for Air
Canada (there are over 400 as a matter of interest) has to file and pay tax
to each province or territory - the calculations are very interesting and we
fill out CRA Form T2203 which all together consists of 75 pages - you can
take a quick look at http://www.cra-arc.gc.ca/E/pbg/tf/t2203/t2203-04e.pdf.
One more person fills out a Multijurisdictional return. That is a person or
business with operations in two provinces. Thus someone with a farm
spanning the Alberta / Saskatchewan border would / should file T2203 and
someone with two service stations on each side of the border would file
T2203. Unfortunately, it does not apply to the sale or deemed disposition
of property.
`
This is more answer than you asked for but might make you feel better (could
make you feel worse) and I hope you can interpret the answer to your
question
-------------
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