Breaking Up Is Hard to Do!

DAVIS LLP, the DAVIS LLP logo is a trade-marks of Davis LLP, © 2007 Davis LLP all rights reserved. Unauthorized copying, distribution and transmission is strictly prohibited.
Breaking Up is Hard to Do!
Institute of Chartered Accountants
2013
Grace G. Choi (Family Law)
Shane Onufrechuk, CA (Tax)

What Accountants Need to Know About
Family Law
1. The Legal Framework for Family
Law in B.C.
2. Characterization and Division of
Family Assets
3. Spousal Support
4. Child Support
5. Tax Deductibility of Legal Costs
6. Other?

Legal Framework Topics
1. We’re Splitting Up – What Now?
2. Family Legislation in B.C.
3. Family Court
4. Alternatives to Trial
5. Sign on the Dotted Line: Family Law Agreements

We’re Splitting Up – What Now?
Options
1. Negotiate a separation agreement
2. Attend mediation
3. Start a court action
4. dispute resolution options and cooperative
approaches under the Family Law Act
 Family law arbitration
 Parenting coordination
 Conduct orders

Family Legislation in B.C.
Family Law Act
 Provincial
 Married or unmarried
spouses
 Division of property
 Custody of children
 Child support
 Spousal support
Divorce Act
 Federal
 Divorce order sought –
statute applies to legal
marriages only
 Child support
 Spousal support

So Sue Me! Family Court
Supreme Court of B.C.
 Divorce
 Division of assets
 Child support
 Spousal support
Provincial Court of B.C.
 Child support
 Spousal support

Family Court (cont’d)
Overview of a Supreme Court Family Action
 Plaintiff files Notice of Family Claim
 Defendant files Response to Notice of Family Claim
 Disclosure obligations
- Financial Statement
- Document disclosure
 Judicial Case Conference
 Non-Final Order applications
 Trial Management Conference
 Trial
 Judgment
 Final Order

Let’s Work it Out: Alternatives to Trial
Courts can require parties to attend family dispute
resolution
Family violence is an important
consideration under the Family
Law Act. Lawyers and courts
must assess whether there is
family violence to determine
the appropriate manner of
resolving disputes

Alternatives to Trial (cont’d)
Mediation
 Parties attend with or without lawyers to try to
resolve issues privately
 Can formulate creative solutions that a court
cannot order
 The mediator will facilitate a resolution but
cannot impose a resolution

Collaborative Law
 Parties and their lawyers agree not to go to
court
 Try to work out issues in negotiations
 If one party wants to go to court, then both
must hire new lawyer for the court process

Family Law Arbitration
 An adjudicative process
 An impartial arbitrator makes a decision for the
parties that is intended to be final, binding and
enforceable
 A party may appeal an arbitration award

Parenting Coordination
 The parties may agree or the court may order that a
parenting coordinator be appointed to assist with
implementation of an order or agreement for parenting
arrangements.
 An appointment is for a maximum two year term, but is
renewable
 To assist in building consensus, aiding communication and
conflict resolution, to improve communication and parenting
skills
 Parenting coordinator may make decisions in
circumstances, per s. 18 of the Family Law Act

Sign on the Dotted Line: “Pre-Nups”
Marriage Agreements or “Pre-Nups”
 Can be done before or during the marriage
 To limit equal division of assets or argument over
why equal division is not fair
Cohabitation Agreements
 Under the Family Law Act, a spouse includes married spouses
and unmarried spouses
 As a consequence, unmarried spouses likely cannot avoid
the property division regime set out in the Family Law Act
on relationship breakdown.
 Unmarried spouses with significant assets should consider
signing cohabitation agreements

Sign on the Dotted Line: Separation
Agreements
 A contract to confirm in writing the
terms of division of assets, spousal
support and child support
 If a marriage or cohabiting
relationship breaks down,
often ideal to negotiate a separation agreement
• Private
• Win/win
• Can make innovative arrangements outside of
the court’s usual remedies

Agreements under the Family Law Act
 Marriage Agreements, Cohabitation Agreements
and Separation Agreements are treated the same
under the Family Law Act
 Section 94(2) – the court may not make an order
respecting the division of property and family debt
that is the subject of an agreement described in s.
93(1) (setting aside agreements respecting property
division), unless all or part of the agreement is set
aside under s. 93

Agreements under the Family Law Act
 Tests for setting aside an agreement include:
• Defects going to formation
 Failure to disclosure significant property or debts, or other
relevant information;
 Improper advantage of vulnerable spouse;
 Lack of understanding of the nature or consequences;
• If the agreement is “significantly unfair”,
 “Significant unfairness” determined by taking into account:
• The length of time since the agreement was made;
• The intention of the parties to achieve certainty;
• The degree of reliance on the agreement
 Meaning of “significantly unfair” will be interpreted by the courts
 Government has stated it intended to make it more difficult for courts to
interfere with freely negotiated, procedurally fair marriage agreements

Family Assets Topics
1. Who is Entitled to Share in Property on Relationship Breakdown?
2. What is an “Asset”?
3. Who Gets What? Dividing Family Assets
4. To Divide (Equally) or Not to Divide,
That is the Question! Reapportionment of Assets
5. What’s Mine is Mine, What’s Yours is Mine, and What’s Ours is Mine …
Determination of Ownership, Possession or Division of Assets
6. The Wolf at the Door! Debts in the Division of Assets
7. Is the Grass Always Greener? Assets Outside of B.C.
8. Income Tax Issues Related to Asset Division
9. Planning Opportunities Related to Asset Division

Who is Entitled to Share in Property?
 Family Law Act:
• Came into force March 18, 2013
• Replaces the Family Relations Act
• Married and unmarried spouses are entitled to
share in property on relationship breakdown

It’s Not Fair! Cohabitation and Division of
Assets
Cohabiting couples under Family Law Act:
 Must qualify as “spouse” to share in property
• Marriage like relationship for more than 2 years
• Excludes persons cohabiting in a marriage like
relationship for less than 2 years who have a
child
 A proceeding for division of property or allocation of
debt between spouses must be brought
• within 2 years of the date of divorce
• within 2 years of the date of separation for unmarried
spouses

Cohabitation and Division of Assets
(cont’d)
 Potential Issues with cohabiting couples:
• When does co-habitation begin?
• What is the date of separation?
• What happens when unmarried
spouses live both together and apart?

What is divided? – Family Property
 Family property is divisible
• All property other than excluded property
(defined later), or property acquired from
excluded assets
• In general, family property is all property
acquired by either spouse after the date of cohabitation
• Includes the increase in value of excluded property after the date of
cohabitation, or inherited assets, and court awards after receipt
 Includes an increase in value of a discretionary trust which may
be problematic
• An interest in a corporation, partnership, or business
• Bank accounts, annuities, RRSPs, and property owing to a spouse
• Trusts to which the spouse contributed and of which the spouse is a
beneficiary, has control over distributions or has the power to
terminate

Family Law Act – Business Assets
Business Assets
 An interest in a business can be considered a
family asset regardless of whether a spouse
contributed to the business
 However, a court will still take into consideration a
spouse’s direct or indirect contribution, financially
or otherwise, to the acquisition, conservation,
improvement, operation or management of a
business owned or operated by at least one of the
spouses when reapportioning family assets

Family Law Act – Excluded Property
 Excluded property is
• Property owned by the spouse at the
date the spouses began to live together
• Property acquired after the date of
separation (and not acquired from other
property)
• Gifts and inheritances to one spouse
• Settlements or damage awards from tort (personal injury)
claims, except that part meant to compensate both spouses or
to replace wages
• Non-property related insurance proceeds, except that part
meant to compensate both spouses or to replace wages
• Trust property unless the beneficiary spouse has an
immediate and absolute interest in the trust property or has the
power to terminate the trust
• Property acquired with excluded property

Who Gets What? Family Law Act
For legally married and unmarried spouses
 Spouses are not be required to go to court
to trigger entitlement to an interest in
family property
 On date of separation, each spouse
• has a right to an undivided half interest
in all family property as a tenant in common
• Is equally responsible for family debt
 Absent a contrary arrangement, the valuation date is either the date
of an agreement or the date of a court order dividing the property or
debt
 The value of family property must be based on fair market value
(s. 87(b)) unless an agreement or order provides otherwise

To Divide (Equally) or Not, That is the
Question! Division of Family Assets
 The court may divide family property and family debts unequally if
it would be significantly unfair not to do so having regard to
specified criteria. The criteria include:
• Length of the relationship
• The terms of any agreement between the spouses, other than
an agreement in s. 93(1) (setting aside agreements respecting
property division)
• A spouse’s contribution to the career of the other spouse
• Whether family debt was incurred in the normal course of the
relationship
• If the amount of family debt exceeds the value of family
property, the ability of each spouse to pay debt
• Whether a spouse has, post-separation, caused a significant
decrease or increase in value of family property or debt
beyond market trends

To Divide (Equally) or Not, That is the Question!
Division of Family Assets (cont’d)
• Where a spouse, other than in good faith
 Substantially reduced the value of family property
 Disposed of property, or changed property into another
form, causing the other spouse's interest in the property or
family property to be defeated or adversely affected; a tax
liability that may be incurred by a spouse as a result of a
transfer or sale of property or any order of the court
• A tax liability that may be incurred by a spouse as a result of
a transfer or sale of property or as a result of an order
• Any other factor that may lead to significant unfairness

To Divide (Equally) or Not, That is the Question!
Division of Family Assets – FLA (cont’d)
 May consider the extent to which financial means and earning
capacity of a spouse have been adversely affected by the
responsibilities and other circumstances of the relationship,
provided spousal support objectives not met
 The change from “unfair” to “substantially unfair” is meant to
create a higher threshold and make the test for reapportionment
stricter

Valuation of Assets
Family Law Act
 The Family Law Act (s. 87(a) provides that value of family
property is fair market value unless an agreement
or order provides otherwise
 Potential Issues:
• Valuation of non-liquid excluded assets at the date the
relationship commenced or the property was acquired may
pose challenges

What’s Mine is Mine, What’s Yours is Mine, What’s Ours is
Mine… Determination of Ownership, Possession or Division
of Assets
Court can:
 Declare ownership of or right of
possession to property
 Transfer title to other spouse or spousal trust
 Make a compensation order
 Order partition or sale of property
 Transfer title to child or trust for child
 Make an order restraining disposal of assets
Family Law Act
 Under certain circumstances, the court can divide excluded assets
between the spouses
• If it would be unfair not to divide the property, given the
 length of the relationship or
 the non-owner’s direct contribution to the excluded property

The Wolf at the Door! Debts and the
Division of Assets
Third party rights cannot be affected by agreement or
court order, but a spouse can seek indemnity from the
other spouse or releases can be sought from the
third party
 Family debt is defined as:
• Debt of either party
• Debt incurred between start of
cohabitation and the date of separation
• Debt incurred after separation if incurred to maintain
family property
 Each spouse is responsible for 50% of the debt, subject
to reapportionment if substantially unfair
 The court may order sale of property to satisfy debts

Is the Grass Always Greener? Assets
Outside of B.C.
Matrimonial property outside of B.C.
under Family Law Act:
 Court can take foreign assets into account
if:
• either spouse is habitually resident in B.C.;
• there is a real and substantial connection
between B.C. and the facts of the case; or
• the parties agree that the Supreme Court has
jurisdiction
 the Court can either divide the extraprovincial
property (if the foreign jurisdiction will respect that
order) or order one spouse to pay compensation to
the other spouse in lieu of dividing the property.

Income Tax Issues Related To Asset
Division
Capital Property – Spousal rollover – ss. 73(1)
Income Tax Act (ITA)
Requirements:
1. Former Spouse or common law partner
2. In settlement of rights arising from marriage
3. Both resident in Canada
4. Can elect out

Division (cont’d)
Capital Property – Other
 Utilization of principal residence exemption
 Utilization of capital gains exemption
 Utilization of divisive reorganization exceptions
 Possible avoidance of section 84.1 (may be able
to use “corporate pre-tax dollars” to fund division
of interests in CCPC shares)
 Utilization of tax losses of spouses

Division (cont’d)
Non-capital property
 Deferred income plans
– RRSP’s, DPSP’s TFSA’s and RRIF’s
 Life insurance policies and annuities

Planning Opportunities Related To Asset
Division
Attribution – property transfers
 Transferor spouse taxed on income or
capital gains derived from transferred
property
 Exclusions from attribution
 Election required for capital gains attribution to be
excluded
Joint and several tax liability s.160 ITA
Other?

Show Me the Money! Spousal Support
Who can receive spousal support?
 Divorce Act: married spouses
 Family Law Act:
• Married spouses
• Unmarried spouses if lived together in “marriage-like relationship”
for more than 2 years
• Unmarried spouses if lived together in “marriage-like relationship”
for less than 2 years who have also had a child together

Spousal Support (cont’d)
Entitlement: threshold issue, may arise based on contract, need
or compensatory principles
Spousal support will only be ordered to the extent the spousal
support objectives have not already been met through an
unequal property division
Spousal support obligations in agreements or
court orders survive the death of the paying
spouse unless the agreement or court order
provides otherwise

Spousal Support Advisory Guidelines:
• “Advisory”, not mandatory
• Courts will follow, unless articulate reason not to do so
• Range of support payable, taking into account the factors for
quantum and duration
Factors for quantum and duration include:
• Need of the recipient
• Means of the payor
• Lifestyle
• Length of marriage
• Ages of parties
• Roles in the marriage

Tax treatment of spousal support
 Included in recipient’s income
 Deductible to the payor if:
1. periodic basis
2. for the maintenance of the recipient
3. recipient is the spouse or former spouse of payor
4. recipient and payor are living separate and apart due to
breakdown of relationship
5. paid pursuant to a court order or written agreement

And for the Kids? Child Support
 Based on income of the payor and
number of children
 Payable even when not biological or
adopted children
 No need to be married, cohabiting or
even dating
 Child Support Guidelines: mandatory
 Divorce not granted unless the court
is satisfied appropriate financial
arrangements made for children,
consistent with the Guidelines

Child Support (cont’d)
 Basic child support until 19 years of age
plus extraordinary expenses
 Extraordinary expenses may include
medical, dental, tuition, and some
recreational activities, among others
 Basic child support and extraordinary
expenses can continue past 19 years of age

Child Support (cont’d)
Tax treatment of child support
 Not taxable for recipient
 Not deductible for payor

Deductibility of Legal Costs
Legal costs to do the following are tax
deductible:
 obtain child support
 obtain spousal support
 obtain an increase in support
 defend against reduction in support
 enforce payment of support arrears

Case Study #1: Jack & Jill
Jack and Jill were married in 1993. They are both 45 years of age.
They have 3 children (20, 18, 16). Jack is an ophthalmologist who
carries on his own practice through a professional corporation.
Jack is the sole shareholder of the company. He works 5 days
per week and takes an annual salary of $200,000, and leaves the
remaining $300,000 of annual profit in the company. The
company has retained earnings of $2,000,000. There is some
goodwill in the company. The company owns $1.5 million in
mutual funds. A preliminary estimate of the corporation’s fair
market value is $3,000,000.
Jill was a nurse at Vancouver General Hospital for 3 years before
she met Jack. She has a pension of an undetermined value. Jill
had their first child shortly after they married and then stayed at
home.

Jack & Jill (cont’d)
Jack has RRSPs worth $300,000 and Jill has RRSPs worth
$150,000. Jill owned the family home in Vancouver prior to the
marriage. It was worth $500,000 at the time of the marriage. Its
2013 assessed value is $1.5 million. There is a $300,000
mortgage against the property.
Jack has an investment portfolio with a cost of $100,000 and a fair
market value of $250,000. The portfolio was purchased during
the marriage.
Jack bought a cottage on Saltspring Island in 1987. He paid off the
mortgage before marrying Jill. The property is now assessed at
$1.5 million. Jack and Jill also own two vehicles, a Volvo
purchased in 2010 and a BMW purchased in 2013.
Last year, Jill’s mother passed away and Jill received an inheritance
of $100,000, which she placed into an investment portfolio. Jack
and Jill are attending mediation and negotiating a separation
agreement.

Jack & Jill (cont’d)
Questions
1. What is the family property?
2. Does Jill have an interest in Jack’s business?
3. If yes, how can the business be divided?
4. What if Jill’s mother passed away 10 years ago? After the
parties separated?
5. Are there any tax attribution implications to consider?

Case Study #2: Ben & Gerri
Ben and Gerri have lived together since 1999. Ben is 50 and Gerri is
48. They have no children. Ben is involved in his family’s
company. The Steinberg Family Trust owns 80% of the shares in
Nutrico Ltd., a small business corporation which manufactures
nutritional supplements. Ben is a discretionary beneficiary of the
trust and holds a direct 20% interest in Nutrico.
Ben has a company, Ben Co., which owns 20% of Steinberg
Properties Ltd., which owns a number of revenue properties. Ben
reported $40,000 of taxable income on his 2012 tax return.
However, this income is not consistent with his spending habits.
While Ben and Gerri lived together they spent $500,000 per year.
Gerri worked as a bank teller but stopped after moving in with Ben.
Since 2005, Gerri has worked at Nutrico making $10,000 per year.
She works 8 hours per day, 4 to 5 days per week. She wants to
go back to school to study interior design.

Ben & Gerri (cont’d)
In 2001 Ben and Gerri purchased a property on Pender Island for
$400,000– a small home on 1 hectare. Gerri contributed
$100,000 from the sale of a condo she owned and Ben
contributed $200,000. The home is in Ben’s name. They planned
to renovate the home and eventually retire there. The property
has significantly increased in value – now assessed at $900,000.
There is a $100,000 mortgage on the property.

Ben & Gerri (cont’d)
Questions
1. Does Gerri have an interest in the Pender Island property?
2. Does Gerri have an interest in Steinberg Properties?
3. Does Gerri have an interest in Nutrico or the trust?
4. Is Gerri entitled to spousal support?
5. What are the remedies a court could order with respect to
the Pender Island property?
6. Does the timing matter in respect of any transfer of Ben’s
interest in Nutrico to Gerri?

DAVIS LLP, the DAVIS LLP logo is a trade-marks of Davis LLP, © 2007 Davis LLP all rights reserved. Unauthorized copying, distribution and transmission is strictly prohibited.
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Breaking Up Is Hard to Do!

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