Hussein: I think I think that is a reason why you know we have a fair court system right and in place so yeah you know again there are a lot of things that happen out there some accountants are fancy where they’ll try and you know put in some other expenses to reduce the income so that the spousal payments are a little bit lower but if the other person feels like you know there’s something that’s not going on right or you know the numbers that are being reported are not correct they have that option to you know get a forensic accountant in and look at the books and and see what’s going on and if there’s anything else that is found they can then take it to court and you know obviously the judge will rule in favor of them and get everything done in a more in a more efficient way.
Nicky: What’s up CorrNation! I’m your host Nicky Correa, CEO of CorrWealth Management and you’re listening to another episode of Coin for Thought. What’s up CorrNation! Welcome to another episode of Coin for Thought! Today I have Hussein Ebrahimjee on the show and he is the co-founder of E&E Accounting so thanks for being on the show Hussein!
Hussein: Thank you for having me.
Nicky: Yeah so today what I want to talk about is you know divorces and taxes all together and just go over some I guess some you know basic things that people would need to know when they’re considering getting a divorce so how does how does the Government really define what a spouse is?
Hussein: So in terms of a spouse there’s depends on whether it’s a common-law partner or a legally married spouse they’re two different issues. If you’re legally married and you are husband and wife, then the way how it’s defined in the Income Tax Act is it’s a legal marriage where two partners have come into a common union and it is done by the law so the only way to break that marriage is through the court and there is no amount of separation that can break that marriage if you’re married legally.
Nicky: Yeah there’s no other way
Nicky: yes so basically you register with the court and then you have to unregister.
Hussein: yes exactly.
Nicky: Yeah so how does that differ from common-law and there’s so many different ideas of what a common-law actually is but what is it to the Government?
Hussein: So as per CRA common-law is staying together for 12 consecutive months without any breakage of more than 90 days in in that in that period as well as there are other three situations that apply where the 12-month rule wouldn’t come into play one of it is if you have a child who’s dependent on the other person with that person or the second one is where there is the other person has custody of your child so even though they may not be the biological parent of your child but if either by birth or adoption so even through adoption they are still the parent of that kid and the third one is whether they have when they have custody of the child.
Hussein: So if if they have custody of the child and the child is dependent on them financially that can still prove that you’re a common-law in that relationship.
Nicky: Okay and what’s the period usually?
Hussein: So the 12-month period is whether whether you have kids or not and then that 12-month period does not come into play if any of these other three scenarios come to play where you have a biological child with that person regardless how long you’ve been you you are common law or either you have an adopted child with that person in whether you’ve been there 12 months or not again and the third one is if they have custody and the child is dependent on that person financially.
Nicky: Right so usually when people get divorced obviously you know everything is 50-50 and divorce is so expensive in this country and you know there’s a lot of hands in your pocket when you’re getting a divorce because there’s so many people you have to pay, you have to pay you know your realtors, you have to pay your lawyer, you have to pay so many people and and one of them is often times the Government right?
Nicky: So the Government also has a hand in your pocket and they come to collect and you know having an accountant be on your side during the divorce process is a really great asset but can you identify why somebody should really have a chat with their accountant before they’re thinking of even getting a divorce?
Hussein: So it is very important for them to talk to their accountants or whoever is dealing with their income taxes. The one main reason is there are a lot of tax implications that come into play and they can be very very expensive. If the right plan is not developed and if things if time if some certain timelines have lapsed, one of the biggest ones obviously when because there’s there are two terms in the Income Tax Act one is arm’s length and then non-arm’s length so there are different tax implications of both and
Nicky: What are they can you define them?
Hussein: So arm’s length is when where you are not related to the other person either by marriage or by blood
Hussein: and non-arm’s length is where you’re related to that person by marriage or blood. In most cases, you’re not related to yours to your spouse by blood
Hussein: it’s always by marriage so
Hussein: You can turn from an non-arm’s length to an arm’s length in one transaction where you’re now if you split the marriage you’ve you’ve gone from non-arm’s length to an arm’s length
Hussein: because you’re not related to them by blood
Hussein:So because of that factor there are a lot of things that in the Income Tax Act wouldn’t apply if you’re an arms length and would apply for your arms length right so you have to be sure that before you legally divorce and you become arm’s length transactions those things have been taken care of so in a in a similar situation just like even whether you’re divorced or not divorced if a husband and a wife jointly owned their family their principal residence and the husband transferred that if they were 50-50 and the husband still transferred to the wife
Nicky: Zero buyout
Hussein: and there wouldn’t even be any tax consequences on that because it’s it’s kind of still in there even land transfer taxes wouldn’t apply in that case
Hussein: but once you become once you become arm’s length then those taxes come into play so that’s why before some certain timeline lapses you have to make sure that you have taken care of the things and then you know there are there are other things like spousal rollovers and all that which are very very complicated tax transactions that we’ll look at when we when we’re looking at rollovers in the corporations and all that stuff that come into play so and obviously for every scenario it’s very very different like it’s not like one thing fits all kind of a thing what may have applied to some other person’s divorce will not apply to you so a lot of times we hear
Nicky: Divorces are very very different very unique
Hussein: Exactly, it’s just like everybody’s tax taxation is different whether you’re divorced or not like what what may apply to you may not apply you know to your friend or to your cousin
Hussein: because it’s it’s just the way how how it is
Nicky: So let’s backtrack to the second for the property thing right because a lot of a lot of say even my clients like they have properties that then they have to sell right or they have to be able to split up and do buyouts on so in a situation like that you could potentially defer your capital gains tax
Hussein: yeah so if it is if it’s a if it’s a principal residence which is your marital house there’s no capital gains
Nicky: capital gains
Hussein: capital gains on it but if you do own rental properties which you had bought it together while you were married and now you’re separating yeah obviously when the other person is disposing you know their share to the other person then there are capital gains that come into play however there are some parts in the income tax act where it allows you to defer those capital gains so one of one of the biggest example is subsection 75 74.5 3b where under that if you elect if you jointly elect under 74.2 under that you can basically defer the capital gain so what what it does is the other partner takes it over and it releases the other party from its tax obligations and whenever the property is sold in the future the other person will then pay whatever the capital
Nicky: I see
Hussein: gains are
Nicky: okay. So let’s go through a couple of forms right because these are really relevant when it comes to divorce so let’s talk about some forms for a second because you need some of these forms for divorce
Nicky: Okay, so what is the T1158?
Hussein: To T1158 is the registration of support payments. You need to register fill this form out and submit it to CRA to make sure that you know they are aware about the support payments and in order to do this you do require a support agreement, a separation agreement that is either through the court or if you’ve not gone through the court if you’ve done it between amicably between the two parties.
Nicky: Okay, what about the T1198 which is the statement of qualifying retroactive spousal support maintenance
Hussein: Yeah so that is if there has been a time lapse that has been passed it’s so basically you’re trying to go retroactive where you haven’t received those payments but you’re trying to go back data so the first one is where you’re going forward dated you’re establishing that that payment going forward the other one is where you’re trying to go back
Nicky: and that’s that’s very common because a lot of times you know when when people separate right so it doesn’t really get set right away right?
Nicky: There’s a there’s a process of time when you know every the couples are trying to figure things out and then you know there are retroactive payments as a result of that time taken
Hussein: Yes, yes that is correct
Nicky: Yeah so the RC65 which is the marital status range
Hussein: Yeah so that is that is very important. CRA gives a lot of emphasis on the RC65 because there are a lot of other things that come into play with what your marital status is especially if when you’re filing your personal income tax return you have to report what your marital status is and when you look in in the in the income tax return there are certain relations like the relationship status it would say single, married, divorced, separated, widowed so there are all these different things and all of them have a meaning to it right a lot of times is the confusion is between married or common-law and separated and divorced because those two are kind of very similar and people fail to understand what they actually mean although the tax treatment may be the same depending on whether you’re married or common-law in terms of the tax credits and the deductions and stuff how you get it however as you know the legal terms are very different between common-law and married and the ways of getting out of that relationships are very different a common-law you do not need to go to court you don’t you don’t need to get a divorce you don’t need to get a lawyer to separate from a common-law partner whereas from marriage you need to go through all those processes until you get the divorce right so it is very important for you to fill out the correct, the status and the main thing is if something changes you have to notify CRA right away because it has a direct implication on your tax matter so especially if you have kids involved there is child tax benefit that is coming into play he way how child tax benefit calculations are calculated is it all depends on the family income right so now it’s joint income between the husband and the wife when that changes the calculation changes and a lot of times people have to pay back a lot of money again when they’ve not notified CRA about the marital status change and then they notify them later on while they’ve still been collecting the payments you know on a different marital status and then CRA comes back up after them you know six months or a year from now and says hey your marital status actually changed on this day you didn’t notify us so we paid you all this amount now you’ve got to give that back to us and already you know when you’re going through that you know the breakup part it’s already hard you’re financially kind of
Hussein: handicapped and now you have this burden from CRA where they’re after you for for the money as well so it’s important and sometimes it’s not just retroactive like you have to pay back but sometimes it could even work in your favor where you know if you’re now going to become a single parent you may be able and you have the full custody of the children in your hand you may you may be able to get even more child tax benefit in that case
Nicky: Okay but in order to file it you need your divorce certificate?
Hussein: No, you don’t so in order it depends on what you’re changing it from so obviously if you’re filing it to divorce then yeah
Hussein: You do need from married to divorce you do need
Hussein: divorce certificate but at least once the step is you’re not going to go directly from married to divorce
Nicky: Right, right
Hussein: there’s a separate
Hussein: thing and
Nicky: then you have to file your separated stuff, then you have to file your divorce okay
Hussein: exactly so
Hussein: the main change is where you have to go from joint to single where that’s where you’re going to go from married to separated at that point
Nicky: and then with the child tax benefits you you file your RC66
Hussein: You can yeah you can do it through your my account as well through the RC66 and CRA now are trying to go more and more online so they are everybody can even update your marital status through the online portal as well not no longer like filling out forms and submitting them through through the mail
Nicky: So what about the T1213, the the reduction of tax deductions at source
Hussein: So that form is mainly used for the person who’s paying the support payments and that is because if you and again by support payments it is spousal support because child child supports are you cannot deduct them it’s it’s not a taxable deduction whereas spousal support is a taxable deduction so in a scenario where a spouse is paying support payments to to to th ex what happens is he can file this form and ask CRA to kind of deduct a little bit more tax from it right and in the in the case where if I feel like I’m going to be saving so much at the end of the day so if I’m paying $10,000 a month in spousal support payments I have $120,000 deduction from my income however whatever I’m making in my income right now is taxed at the highest rate so I can I can write that and I can fill that form out so that my tax deductions can be lowered at that point
Nicky: Let’s talk about business owners getting divorced so obviously if two business owners are getting divorced and say they share a business together okay and one person wants to make the other person less of a shareholder in the corporation okay what has to happen in order for that to happen
Hussein: So usually you cannot make another person a lesser of a shareholder legally without that person signing so unless the other spouse is legally signing on whatever terms has been offered to buy their shares out and they’re agreeing to that that’s a different thing but it cannot just be done behind their backs right so the proper channels have to be followed there has to be a fair market valuation of the business and depending on what the market value is if the other spouse is in agreement to get paid out or bought out then that’s that’s a different different scenario but somebody cannot just take away your shares because a corporation is a separate legal entity according to the Income Tax Act so although you’re married and you own shares on that your your shares are your shares his shares are his shares and you own the separate legal entity so the marriage cannot break down that entity right and even if in some scenarios you know if partners can work amicably at the business you can still continue with the same shareholdings that you had in that business as long as you know you can work amicably and put your personal life aside and the business life aside.
Nicky: so let’s talk about the fair market value, how does a business truly get evaluated?
Hussein: So that’s that’s where like you you need to get an accountant in into the into that scenario where they would do a an evaluation so there are a lot of things which comes into play, one is the what are the assets like on the books in the corporation so we look at that, we also look at what the growth is so when we do a projection so because you cannot just buy them out as of right now but you also have to look at where the business has come from what the profits are looking and when somebody is looking to get out they’re also looking to recoup all the sweat equity that they’ve put into that business right so there’s scenarios where goodwill comes into play
Nicky: what is goodwill
Hussein: Goodwill is kind of where somebody’s willing to pay over what the valuation is so if if the value of the business comes out to a hundred thousand and I want to buy that person out I can pay $150,000 so the other $50,000 is now considered a goodwill that I’m paying on top of what the valuation is just to entice the other person to go and to make it to make it more of a sweet sweeter deal and you can kind of then depreciate that goodwill on the books once that person has has gone
Nicky: A lot of times you know when spousal support is set no one wants to really pay spousal support I think that a lot of times you if you have to pay spousal support you have no interest in doing it because you’re paying for a spouse that you no longer have. So there’s a lot of fear especially with business owners because if say for example, what happens if I decide to sell my business or you know there’s a lot of talk where oh they have a fancy accountant and their accountant is doing some sort of hanky-panky and you know reducing you know their their income what do you have to say to stuff like that?
Hussein: I think I think that is a reason why you know we have a fair court system right and in place so yeah you know again there are a lot of things that happen out there some accountants are fancy where they’ll try and you know put in some other expenses to reduce the income so that the spousal payments are a little bit lower but if the other person feels like you know there’s something that’s not going on right or you know the numbers that are being reported are not correct, they have that option to you know get a forensic accountant in and look at the books and and see what’s going on and if there’s anything else that is found, they can then take it to court and you know obviously the judge will rule in favor of them and get everything done in a more in a more efficient way.
Nicky: What is the difference between a regular accountant and a forensic account?
Hussein: Forensic accountants are mainly kind of trained to go more in detail so there it’s kind of when you look the same way where you have a police officer and like
Nicky: a detective
Hussein: a detective right, they they’re probably a little bit more in similar but they they have they have this instinct they’re trained to have this nature of being more inquisitive where they can look and dig and dig further until they get to the root source of what what’s kind of going on where an accountant can give you a general overview from the numbers but you know they will probably not dig in as much as where a forensic account would dig into
Nicky: Okay there’s a lot of talk these days about say for example, my husband has offshore money. Describe offshore money, describe what that means. You know like it’s it’s hard to be able to because a lot of times you know you put money offshore but how do you access that money because there’s there’s a trace to pretty much everything when you’re bringing it back so it’s really hard. You may have like millions and millions and millions of dollars but transferring that money out in a time of need, it’s not really efficient to do that but it is efficient I guess we’re hiding but when someone is going through a divorce and they suspect that there is offshore money, what does that even mean? What is offshore money?
Hussein: So offshore money is usually you know when people are trying to hide, it’s more of tax evasion which people try and use offshore accounts for where they feel like there’s no tax treaty between Canada and that other country and you know they can hide it over there because of not being in place that the the treaty not being in place it’s a tax haven heaven where there’s no
Nicky: Describe the treaty.
Hussein: A treaty is where so Canada has tax treaties with a lot of countries where they share information between each other, So like Canada and US tax treaty is like a treaty where they set into place and there are a lot of things that are described in the tax treaty so they’re double taxation rules where it kind of avoids if somebody was a dual citizenship you know he’s not paying taxes both in Canada and the United States so the two countries kind of sit together and put up a treaty where they’re in agreement of something saying okay if your US guy is already taxed on the income that maybe he made in Canada when he’s filing a Canadian tax return, we’re not going to tax him again on that money, he may have to pay a tax differential. So let’s say the tax rate he paid in the US was 30 percent. However, the tax rate in Canada is 40. He’ll just have to pay the 10 percent difference but they’ll still give him a credit for 30 percent that he actually paid in in in the United States and when there’s a tax treaty in place it’s easier for CRA to access information because you know IRS will share some information with CRA and vice versa whereas if there’s no tax treaty in place between two countries then it’s it’s harder for CRA to find out what’s happening because obviously you know like their bank account would their banks would not be sharing that information over here and it kind of becomes harder for CRA. I’m not saying it’s impossible they still have their ways of finding out where where the money went and what’s happening however it maybe takes them a little bit more longer time to do that than when there’s a tax treaty in place, it’s very simple for them to find it out.
Nicky: So how does that affect you know if someone says like I think my husband has or I think my wife has offshore money
Hussein: So usually if if there is that that suspicion that there is some money that is outside at that point in time that’s when you have to get a forensic accountant to come in and do the investigation to because they will go back and trace everything until from when the money left so if there was any money that has left the bank account they would dig it and find out where that money is going for what it’s for and they’ll come down to the root cause of pretty much what it is right and if if there’s any transaction that has gone through it where there is no supporting evidence on why it should have gone there then you they know that there is something being hidden about it right
Nicky: Right. A lot of times when you know employees are leaving business owners, it forces them to have a better understanding of what being a business owner might be like because sometimes in their marriage they might not have taken part or you know taken the time to really understand hey my husband or my wife is in a business this is what being a business owner entrepreneur means and a lot of that you know comes into play when they look at the expenses there’s a lot of expenses that business owners might write off that employees cannot like say for example meals and entertainment okay or like you know your gas or things like that which you know once you really learn about it it kind of sets you back because you feel like oh my god this is almost like like fraud but like why do they get to do it but I don’t get to do it and all of that stuff so can you explain more about the employee stance with the government and the business owners kind of stance and and do a little comparison that way
Hussein: Yeah so it’s this is one of the topics where you know there’s a lot there’s been a lot of talks where people say you know business owners get a more preferential tax treatment because they can write off a lot of things and it is a general misconception as well because some people think oh you can write off anything i’ve i’ve had clients coming in and say can I write off my clothes, can I write off you know my shoes, like those are stuff that are not allowed to be written off by the Income Tax Act. Yeah, there are hanky-panky accountants who do that to please their clients and get their business. However, that’s not right. There are legitimate expenses that need to be incurred as a business owner that do not need to be incurred as an employee. So a general example like meals and entertainment, if you’re employed by a company and your job is not to bring in more business you’re just sitting on the desk doing what you are you’re not a client-facing employee, why would you be allowed a meals and entertainment expense whereas a business owner again, he’s not allowed a meals and entertainment expense to take his family out for dinner. He’s allowed that meals and entertainment expense to actually take a prospective client out for lunch or a dinner and close the deal so that he can earn revenue by using that expense right. If he maybe you know if he didn’t do that, if he didn’t incur that expense he may not have landed that client whereas an employee did not need to do that expense to increase his salary or wage. However, I’m not sure if you’re aware about it but employees earning commission, so like sales employees, they’re allowed to write their uh meals in entertainment expense.
Nicky: Yeah the T2200
Hussein: so they get a t2200 from their company and you know they are allowed to go go and take those clients out for meals although they’re still employed they do not own that company but it’s it’s pretty much the same because they’re using that not to take the family out for a meal but they’re taking a prospective client out for a meal and you know in return they’re expecting some sort of an income
Hussein: out of that right. So it’s the same way you know where people write off their cars if if a business owner needs to drive around to attend business meetings or to visit his clients offices, he’s allowed to write off those expenses because he’s actually doing that in the course of earning income whereas an employee does not need to drive because he’s sitting in an office he’s only driving is from home to to work and the same thing with the business owner from home to his place of business is not considered a taxable expense he cannot deduct that kilometers where he’s actually driving from home to his to his work
Nicky: Okay, in general what do you what kind of advice do you give people who are going to get a divorce?
Hussein: It is a big decision obviously right just the way how people think a lot when they get married it’s a huge step in their life. This is a huge step in your life as well. You have to think about a lot of things you know that are that come into play you know obviously if you have kids that that’s another aspect of it but my biggest advice is you know make sure that you have the correct advice, you’re in contact with the right professionals who would be able to help you guide through this process. Some of the professionals you know that you need to have talked to it about before you even you know take the step of doing it and understand what you’re what you’re what you’re getting into is you know you need to speak to a lawyer, you need to speak to an accountant, you need to speak to a financial advisor to because all these things have an effect in how things will turn up and you need to get that advice on you know what you’re getting into what will be the financial impact on this and what will also be the family impact because sometimes you know it’s not even about the financial aspect when you have kids and you know you’re going into shared custody and all that are you emotionally okay to kind of go through that you know in in in all that ways and obviously the whole court process and you know that whole time while everything is going on is mentally very very tiring so you one thing is you need to be prepared for you know for that period of time because it’s not just as simple as going from married to divorced the next day it is a long process that and it’s a long drawn out process.
Nicky: Yeah, you can’t break up a marriage overnight
Hussein: Yes, no matter how short it is but the longer it is there’s more to kind of go through right to kind of end that marriage so well thank you so much for coming on the show I really appreciate your insight.
Hussein: Thank you for having me.
Nicky: If you guys want to work with Hussein, check out more about him and his company, check out his links below. Thanks everyone and have a great day. We’ll see you soon. Bye.