Hi,
I have a client who is going through ‘an amicable’ divorce. After the divorce is finalized, the couple will both be on title of a rental property (for financing purposes). He gets all the rental income and is responsible to pay for all expenses.
Question: Since both are on title, the net rental income needs to be reported 50-50% or because he actually gets the income/pays for expenses, he gets to declare the property 100%?
Thank you!
Whatever arrangement they come to should be heavily documented and signed by both parties. This is another of those “bare trust” situations that has the potential to turn our really badly for one, or both, parties.
As well, consideration should be given to the disposition, and capital gains issues arising.
The problem is that “for financing purposes” doesn’t have a generally understood structure. CRA can construe whatever they feel like absent good written documentation, and a signed agreement.
eg. it appears that the wife is disposing of her financial and beneficial interest in the property at the date of separation/divorce/agreed date. When they dispose of the property in 5 years and she comes off title…will she report a disposition? Will she report it this year?
Not a question answerable here, and one that SHOULD involve competent tax advice from a tax lawyer.
If asked of me, that’s where I’d point them. If they chose not to do so, I’d likely decline the file. Too many issues.
I’ve seen a few “amicable” splits over the years. Mostly they are trying to avoid costly legal expenses which is understandable. In many of these situations, though, the documentation is drawn up by a mediator and misses some key points. I agree with @SmallBizGuy that this situation should be documented properly by a lawyer. The agreement should document that she is remaining on title for financing purposes only until the end of the mortgage term but otherwise is disposing of her interest in the property in settlement of their matrimonial matter (so there is no taxable gain to her). He also would benefit from the agreement to ensure he doesn’t have to pay her anything in the future to get her off the title (just in case it’s not so “amicable” down the road … which I’ve also seen). The involvement of a lawyer would be good, too, so she understands that she is giving up her “rights” to ownership but is maintaining the “responsibilities” of ownership which could include liability.
Since they likely will have to file a T3 under the new rules, they should have a well-drafted agreement since that will be the document under which the bare trust is created (and will likely have to be sent to CRA to get the Trust #).
EDIT - I had a client who was asked by his nephew to go on title for the purchase of a family property. My client’s lawyer advised him that the bank could refuse to release my client from the mortgage upon renewal. Just an FYI for the wife to check.