Till liability do us part

National Post


The Supreme Court splits up the family tax shelter

The Canada Revenue Agency continues to vigilantly attack tax shelters, sticking tens of thousands of Canadians with billions of dollars in disallowed donation claims. Perhaps you are breathing a sigh of relief, knowing you've managed to steer clear of potentially risky investments.

But what if it was your spouse who invested in a tax shelter? Could you be on the hook for a portion of the taxes, interest and penalties owing on a future reassessment?

Or, what if you are getting divorced -- could a future tax liability of your ex come back to haunt you?

Earlier this month, the Supreme Court of Canada had to decide whether a husband's future tax liability for investing in a tax shelter should be included as part of the division of family assets for the divorced couple.

Wayne and Malka Stein were married for 12 years, during which Mr. Stein provided for his family financially while Mrs. Stein took care of the home and the couple's two children. The couple divorced in 2003, and British Columbia's Supreme Court divided the couple's $1.7-million of assets equally between the husband and wife, as was required under provincial law.

As part of the settlement, Mrs. Stein kept the family home, while Mr. Stein kept the family business. They split the family's bank accounts, investments and RRSPs.

While the Steins were married, Mr. Stein invested in several limited-partnership film tax shelters, which are currently being challenged by the CRA.

The issue before the Supreme Court was whether the liability for taxes and interest that could arise in the future from investing in the tax shelters must be taken into account when splitting the assets upon divorce.

The B. C. Supreme Court, which first heard the case in April, 2005,

concluded that since both Mr. and Mrs. Stein benefitted during their marriage from the tax shelters, any contingent liability arising in the future should be split 50/50.

This was overturned by the B. C. Court of Appeal in September, 2006, which decided that the province's Family Relations Act "precludes the kind of 'freestanding' division of debt performed by the trial judge."

The appeal court felt that since the nature of any potential tax liability was "speculative," this prevented a "rational adjustment of the property," and Mr. Stein alone should be on the hook for any contingent liability.

The Supreme Court of Canada disagreed and restored the decision of the original trial judge. The Court felt that, despite the fact the contingent liability cannot be currently measured, since both husband and wife benefitted from the tax shelter, fairness requires that the debt also be shared equally.

Sometimes it pays to know how the other half is investing.