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My husband and I are divorcing and I am coming back to Canada. What am I entitled to? What do I have to pay tax on?
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david ingram replies:
Good Question.
The property rules for divorcing couples are different in every Province in canada and every state in the United States. In addition, there are at least seven different state legislated treatments of Community Property in the US and BC treats property differently than most of the indidual states.
I spent twenty years as a divorce counsellor for the splitting of marital and business property but took my name out of the yellow pages 6 years ago and have not kept up for all the states.
However, since you are moving from Washington State to BC, I am pleased to say that I "think" I can deal with it because I have kept up on those two jurisdictions I caution the reader that I am NOT up on community property in Arizona which is different from community property in California and they are both different from Louisiana adn Quebec. (Louisiana and Quebec have a French heritage and Arizona and California have Spanish inputs).
The major difference between Washington State and BC is that in Washington State "EVERYTHING" (including salaries) is community property "right NOW", unless a document has been specifically filed to the contrary under the Married Woman's Separate Property Act. In British Columbia, everything is presumed to be the property of the registered owner or the person who bought the item until there is a marraige breakdown.
In BC, the family assets are then presumed to be owned fifty/fifty upon a triggering event.
This entitlement to a one-half interest in family assets only exists at the moment that a triggering even occurs:
1. there is a separation agreement,
2. a B.C. Court has declared "that the spouses have no reasonable prospect of reconciliation",
3 if the parties are divorced or
4. if the marriage has been declared null and void
The date of the triggering event determines the date for the determination of what "is" and what "is not" a family asset, although the date can be changed by a court for reasons of fairness. Assets bought by either partner "after" the triggering event are not family assets unless they were purchased with family assets or from the proceeds of a family asset. The mere fact of separating is not a triggering event in BC.
This is a totally different position from that in Washington state where you are coming from. For instance, in Washington State, if you and your husband are bothe working and for any number of reasons, teh two of you should decide to file your income tax returns as "MFS" (married filing separately), you have to split both salaries in half and you report half of yours and half of his on your return and half of yours and half of his on his return.
In general, the money and property is easy to split and is a mathematical exercise involving appraisals and after tax equities. For instance, in Washington State, you are entitled to half of your husband's future pensions and half of his 401(K) and half of his IRA and half of his boat and travel trailer and gun collection.
In BC, you would be entitled to half of his Pension, half of his RRSP, and half of the family boat and travel trailer. However, if the gun collection was locked away in his office or in a safe (as it is supposed to be) and not on display in the family home, than the gun collection might be ruled to be his private property and not a family asset. In the US, you would get half of the artwork in storage or on the wall, but in BC, is you had an artwork collection which had been inherited from you family and you never every displayed it in the home, that artwork would be yours. Likewise, if you had inherited a $1,000,000 stock portfolio and had never taken a cent out of it for family purposes, in BC, it is yours.
Businesses are also family assets in BC if income from the business was used for family purposes. Therefore, a husband cannot claim the business is "his" because his wife never stepped inside the door. In addition a wife's efficient running of the family home to allow her husband time to go to work is considered sufficient input into the business. And where a husband bought his wife a fur coat to wear to company affairs, the fur coat was deemed a family asset even though an inherited jewelry collection was not.
I was an expert witness in an interesting divorce case a while ago. To put it into perspective, the family had lived in BC and California. He owned property in (Not the real places) Seattle and Bellingham and Victoria and she owned the residence in which two fairly large businesses operated. He owned one business he had before marriage and she owned a business they started after marriag and both businesses operated in BC and Washington and her business had operated in California, Washington and BC. I was an expert witnes for the valuation of the business, the valuation of the properties and the taxation thereon
I was also at their wedding and had a personal interest in fairness. When my client had first come to me, I had simply said fifty / fifty. Unfortunately, the wife was not satisfied with 50 / 50 and went through three lawyers trying to get more because "after all" the residence and business premises were registered in her name. There was also a custody battle over the daughter.
One of the better parts of the case was that testimony showed that the business premises/residence was int eh new wife's name to keep it out ofthe hands of the previous wife and ditto for the ownership of the new business started after marriage.
By the time the dust had settled, wife # 2 had spent (are you ready for this) $270,000 in lawyer's fees and received one/quarter of the house / business assets because she had proven herself that she was not really entitled to 1/2 even though the premises were registered in her name. Her ownership was a ruse which may have worked against ordinary creditors but failed under family law in BC.
Wife number one had come back into the picture and without even showing up in court, the judge awarded her 1/2 of the value of the Seatle property (Washington Community property law) which had been bought during that marriage.
Wife number two got no value for the business because she had not contributed to it and they had started the business in her name for anything new and the new business in her name had done more business than the old business which had just limped along while they had built up the new one. Her lawyer's bills were $120,000 more than she recieved for a settlement.
If she had taken the original 50/50 (on value) offer, she would have received $300,000 and had no legal bills. Of course, husband quit working inhis wife's business and it failed immediately. The judge awarded custody of the daughter to the mother and a year later, the daughter had voted with her feet and was living with dad.
If you are divorcing, do your best to stay out of litigation. If your lawyer wants to write anything threatening and negative to your husband, change lawyers and find a mediator. If your mediator is not working find another mediator.
If there is a custody issue, get hold of Michael and Carleen Brennan's excellent book, "CUSTODY FOR FATHERS". Mothers AND Fathers should read it. If we can both stop our posturing and our emotion, we will do better. Men can learn what not to do in a custody action and women can learn what not to do at the same time by reading this book. ISBN 0-9544157-4-0. If we stop the posturing, we will all do better.
You can order direct fom the author at 1 (949) 646-9842 - Fax order to 1 (949) 646-3453 The price is $24.95 US and worth every cent.
You can also buy it at a $10.00 discount for $15.00 new or $13.95 used at Amazon books at http://www.amazon.com/exec/obidos/tg/stores/offering/list/-/0964415704/all/ref=dp_bb_a/104-4109833-6489558
Michael is best known as one of the two attorneys representing Donald Clark, Marsha's husband in their custody battle during the O J Simpson trial. His co-author and wife Carleen Brennan is from BC.
Oh yes - you asked about tax. Whatever you split up now has no immediate tax consequences. Taxes occur when you decide to cashg inthe 401(K) or the RRSP you split or sell a business property or rented apartment or summer cabin, etc. Your advisonr should recognize the future tax consequences when you split up the assets. for instance $100,000 in a 401K and $100,000 equity in the family home are NOT the same.
Neither is $100,000 equity in a 401K or RRSP the same as $100,000 equity in a rental apartment. In the US, the $100,000 401K bears full tax plus a 10% penalty (if taken out before 59 1/2 if not disabled in some manner) and the $100,000 equity ion the rental property may not be all taxable and if it is, the US will limit the tax to 20% and Canada will limit the tax to 24% or so and the RRSP or 401K can be taxed as high as 44% in Canada and even higher in the US.
David Ingram's US/Canada Services
US / Canada / Mexico tax and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321
New email to [email protected]
www.centa.com www.david-ingram.com
Disclaimer: This question has been answered without detailed information or consultation and is to be regarded only as general comment. Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
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