A deemed disposition is when, for instance, the government reports that you sold property of value when you didn’t actually sell that property yet. Let me put this in context further.
Canada has an exit tax. They tax their residents what is known as a capital gains tax when they move out of the country. The date of the taxpayer no longer is a resident of Canada is the date of demarcation (“Date of Exit”) to calculate the capital gains tax. Like most countries, Canada takes the difference between the value as of the date the resident became a non-resident (i.e. permanently left the country as a resident) and the tax basis of the property. The tax basis may translate into the purchase price plus improvements plus or minus other factors.
This exit tax is important to understand in context to a divorce. Why? Questions that arise are:
- Who is listed on the deed?
- When does the exit tax have to be paid? Note: It doesn’t always have to be paid once you leave the country. You may be able to pay it when you sell the property. This enables you to maintain short term liquidity until you obtain the proceeds from the sale of the property.
- Should you record a liability on your marital estate during your divorce? If so, why? If not, why not?
- How should any liabilities be incorporated into your settlement structure to arrive at a fair outcome for both parties?
- How can you be assured the exit tax was paid in full and the government not be looking for money from you after the divorce is finalized? Representations and warranties in your decree may not cut it. Furthermore, the government does not care about your divorce decree. So, these issues need to be ironed out before you sign your marital separation agreement.
- If you are in between the Date of Exit and the Date of Sale, will you incur additional capital gains taxes upon sale of the property? If so, how should you handle that?
- What happens if you leave the country, your name is on the deed, but your spouse remains in the country? How does that work for the Exit Tax aside from any capital gains that can be incurred over time?
- What happens if the property increases or decreases in value from the exit date?
- How were the proceeds from the sale of the property utilized?
There are many questions that arise that have to be diligently handled to manage the outcomes of the divorce. An exit tax (i.e. a liability imposed from a deemed disposition) needs to be diligently managed so you do not get stuck paying the bill when it should have been addressed in your divorce negotiations.
If you have questions or want to better understand some of these matters, feel free to reach out. We provide a free 30-60 minute call where you will have no obligation to work with us whatsoever. During the call we will function as your fiduciary and will strive to answer any question that arises.
My name is Larry Smith. I’m a CPA and an MBA. I am an expert in divorce finance, divorce architecture, interpersonal conflict, divorce negotiations and more. I started our practice in 2003. I discovered there were a lot of missing financial frameworks for divorce where divorce is comprised of 95-98% financial issues and 2-5% legal matters. If you want to connect feel free to send me an email at [email protected] or call me at 617-680-5222. I will do my best to help you on the call.