When spouses separate they need to determine the value of their assets. Some assets like a corporation or an investment property have what we call accrued tax or distributive tax. This means that if one spouse is keeping an asset and selling it or taking money out of it at a later date they may have to pay some tax.


If the asset is an investment property there could be capital gains tax payable on the sale of that property. Capital gains tax is a tax on any increase in the value of the asset from the date it was acquired.


If the asset is a corporation, in order to take any money out of the corporation the spouse will receive either a wage or a dividend both of which are taxable income to that spouse. If the corporation is sold tax will also be payable.


A recent decision of the Supreme Court of British Columbia, McKenzie v McKenzie 2015 BCSC 241, addresses this issue:


 Distributive Taxes


[4]     The result of the decisions aforesaid is that the shares in Comaxco are a family asset in which the respondent has a 10% interest. A 10% interest in Comaxco is valued at $607,000. The Court of Appeal noted at para. 118 that the 10% interest in Comaxco “may need to be reduced on account of distributive taxes”. The question before me is whether it should be reduced and, if so, by what amount?


[5]     The most recent decision of the Court of Appeal on the issue of compensation payments and distributive taxes is Weintz v. Weintz, 2014 BCCA 118. Madam Justice Smith in Weintz at para. 1 referred to the question there as “the vexing issue of how to give effect to a division of assets pursuant to s. 66 of the Family Relations Act, R.S.B.C. 1996, c. 128 [FRA] that includes shares in a closely held corporation”. The same question arises here.


[6]     In Laxton v. Coglon, 2008 BCCA 414 at paras. 52-54, 58 R.F.L (6th) 1, Madam Justice Saunders usefully summarized the issue there:


[52] I am persuaded, however, that the personal tax consequences to the party selling the shares should have been deducted from the compensation award. While s. 66 of the FRA gives the court a broad discretion to “determine any matter respecting the ownership, right of possession or division of property,” the court must consider relevant factors that alter valuation. The tax consequences attracted by the sale an asset in order to realize the amount of the compensation is a relevant factor. This factor relates to Southin J.A.’s characterization in Blackett, at 343, of the “cash in hand” advantage. If an asset must be sold in order for the non-owning spouse to realize his or her interest in that asset, then the tax consequences arising from the sale of that asset must be taken into account when determining the amount of the compensation order.


[53] Madam Justice Huddart in Kowalewich v. Kowalewich (1998), 50 B.C.L.R. (3d) 12 (C.A.), also recognized the relevance of this factor when she stated, for the Court, at para. 12:


[12] … As this court explained in Blackett v. Blackett (1989), 40 B.C.L.R. (2d) 99 (B.C.C.A.) and Halpin v. Halpin (1996), 27 B.C.L.R. (3d) 305 (B.C.C.A.), the cost of borrowing, the tax consequences of a transfer of ownership, and any other costs to effect an in specie division, must be taken into account in determining the amount to be paid to adjust the division under section 66(2)(c) of the Family Relations Act. As Madam Justice Southin reminded us in Blackett, section 66 is not an expropriation provision. It is a mechanism to adjust matters between spouses who do not wish to continue in their joint ventures as joint owners.


[54] In this case, the compensation order was predicated on a finding that, if Mr. Coglon had made the appropriate disclosure at the material time, Ms. Laxton would have exercised the options and sold her 20% interest in the Heartland Public shares between June 2003 and August 2003. In the alternative, if Mr. Mericle’s evidence is accepted, the share options could have been disposed of by either party. Had either party done so, they would have paid capital gains tax on the sale of the shares. Blackett and Kowalewich are authority for the principle that, in these circumstances, a compensation order should reflect the tax consequences that the disposing party would have incurred. This would have yielded the sale proceeds net of the option exercise price and the capital gains tax.

[Emphasis added.]


[7]     Not all compensation orders include disposition costs or tax consequences arising from a transfer of property. In Ouellette v. Ouellette, 2012 BCCA 145 at paras. 27-32, the Court declined to take hypothetical and speculative disposition costs into account where no sale was contemplated and funds were available wholly from the sale of the matrimonial home. In Ouellette, however, the only issue at trial was the appropriate amount of the compensation to pay Mrs. Ouellette, not whether it would be fair to Mr. Ouellette to pay compensation in any particular manner or at all.


[8]     In my view the principles arising from Weintz, Laxton, Ouellette, Blackett, and Halpin are:


(1) where there is sufficient evidence to satisfy the Court of tax consequences or other costs inherent in a compensation order the Court should take these into account in setting the compensation amount;

(2) the onus is on the payor to provide the trial judge with the necessary evidence of the tax consequences arising from the division of assets or other consequences of having to acquire the funds to pay the payee;

(3) there is no absolute rule as to how the compensation order might be calculated, depending, as it does, on the type of assets to divided, timing, the parties involved and other orders in the action;

(4) the matter should be considered as of the date of trial, not as of the date the matter comes back before the court; and

(5) the overriding principle is fairness.

Deborah A. Todd
Deborah A. Todd