Tax Hits for Ex-Spouses

The May 19, 2010 edition of the National Post contained an article regarding possible tax liabilities that ex-spouses face due to their break-up. The article discusses subsection 160(1) of the Income Tax Act which creates a tax liability to a recipient of property when the property is received from a non-arm’s length taxpayer; the amount of the liability is limited to the value of the property transferred. The article raises the scenario where an individual could become liable for their ex-spouse’s tax liability upon the transfer of property that occurs due to a separation. However, there is an exception to this rule.

Subsection 160(4) of the Income Tax Act states that where the transfer of property is pursuant to either an order or judgment from a court or a separation agreement, and at the time of the transfer, the parties were separated and living apart due to a breakdown of their marriage or common-law partnership, the recipient ceases to be jointly and severally liable for the transferor’s tax liability. This exception is in-line with other exceptions to other provisions (such as spousal attribution) upon the breakdown of a marriage or common-law partnership.

Therefore, based on this provision, individuals who are undergoing a breakdown of a marriage or common-law partnership should structure any property transfer to ensure that it meets the criteria in subsection 160(4). If they do, they can avoid one of the scenarios raised in this article.