WHICH IS WORSE? DIVORCE OR THE NEW TAX ON CAPITAL GAINS

ANSWER = BOTH

With the changes to capital gains tax set to take effect in June 2024, divorce lawyers and mediators are bracing for a shift in how they handle asset division during divorce settlements.

The changes in the capital gains tax will significantly impact the calculation of spouses' net family properties and equalization payments.?

Under the current system, only 50% of capital gains are included in taxable income, offering a favourable tax treatment for all investors and a lesser notional tax deduction in divorce. However, the new regulations will see an increase in the inclusion rate for taxable capital gains to 66.67% for spouses realizing capital gains exceeding $250,000 in a year. This change poses complex challenges for divorcing couples, particularly concerning the valuation and distribution of family assets.?

The rise in the inclusion rate introduces a gray area in the assessment of the net family property of a spouse, as assets held personally will be subject to different tax rates depending on various factors such as the timing of disposal (eg. date of separation). For instance, the calculation of the notional capital gains tax on a vacation property or investment portfolio may trigger higher deductions in the net family property, thus complicating the equalization process. Moreover, spouses with substantial investment portfolios may struggle to avoid exceeding the $250,000 threshold, especially in scenarios involving the transfer of assets to the next generation or the deemed disposition of capital property upon death or departure from Canada.?

To mitigate tax burdens, the Income Tax Act permits the spreading of capital gains over up to five years using capital gains reserves. However, it remains unclear whether this strategy will be effective in circumventing the higher inclusion rate for gains exceeding $250,000 in a single year.?

As the deadline approaches, some spouses are triggering their date of separation or sale of capital property to pre-emptively manage their tax liabilities. This rush underscores the urgency for divorcing couples to reassess their settlement strategies and consider the implications of accelerated transfers, especially concerning properties earmarked for future generations.?

Furthermore, the changes in capital gains taxation will impact the calculation of income for support purposes. While the current system allows for a significant income tax gross-up on capital gains, the proposed inclusion rate will result in a reduced gross-up, affecting the determination of support obligations.?

In conclusion, the impending changes to capital gains tax rules necessitate a proactive approach to divorce settlements, with a keen awareness of the implications for asset division and support obligations.??

Divorce lawyers and mediators must adapt their strategies to navigate this evolving landscape and ensure equitable outcomes for their clients amidst the complexities of tax law reform.

Steve Benmor, B.Sc., LL.B., LL.M. (Family Law), C.S., is the founder and principal lawyer of Benmor Family Law Group, a boutique matrimonial law firm in downtown Toronto.?He is a Certified?Specialist?in Family Law and was admitted as a Fellow to the prestigious International Academy of Family Lawyers. Steve is regularly retained as a Divorce Mediator, Arbitrator and Parenting Coordinator. As a?Divorce Mediator, Steve uses his 30 years of in-depth knowledge of family law,?court-room experience?and expert problem-solving skills in Divorce Mediation to help spouses reach fair, fast and cooperative divorce settlements without the financial losses, emotional costs and lengthy delays from divorce court.?You can find his CV at https://benmor.com/wp-content/uploads/2023/12/Steve_CV_Nov23.pdf.?He can be reached at [email protected]