One common mistake I see people make often when trying to do their own divorce is to transfer property to their spouse, transfer a home out of joint names, make a settlement payment, or transfer shares in a company before a formal separation agreement is created and signed. Thinking that they are done once they have agreed upon the terms of settlement between themselves, the separating spouses give no second thought to completing the transaction with their spouse by themselves.
This is a mistake and can be a costly one. Here are a few potential risks of completing a transaction with your ex-spouse without having all of the paperwork completed:
1. Tax. The transfer of property, both real property and personal property, between two individuals is a taxable event. Tax is paid on the difference in the sale price of the property and its former purchase price. The Income Tax Act permits a rollover of an asset, essentially permitting the property to be transferred between two separating spouses without any tax being paid, so long as it is done pursuant to a separation agreement or a court order. If you transfer an asset without a separation agreement to your ex-spouse, you could be taxed on it.
2. RRSP’s cannot be transferred without a separation agreement. If you try to transfer your RRSP’s to your spouse, you could have the funds deregistered, pay tax on them, and lose the contribution room without the ability to replace the funds into your RRSP’s.
3. Transferring the title to a home does not remove you from the liability on a mortgage. If you transfer your former family home from your joint names to your spouse’s name, you will still be liable under the mortgage. The mortgage will show up on your credit report, so you may not be able to qualify for a new mortgage because of the old one. If your spouse defaults on the mortgage payments, your credit will be affected. You may be responsible for the balance of the mortgage if your mortgage is a high ration mortgage, such as a CMHC mortgage. If your spouse does not refinancing the mortgage, you will have no recourse without a separation agreement.
4. Your spouse may change his or her mind, and want something different or more after the payment has been made. Because you do not have a separation agreement saying that the division of your property is complete, your spouse could start the process all over again, with the assistance of a Court.
The cost of a separation agreement is inexpensive when compared with the risk of not having a separation drafted by, and signed with a family lawyer. The goal of reaching an agreement with your spouse is to have a final agreement that will be upheld, respected and enforced. A separation agreement achieves those objectives, and gives you the peace of mind that you have finalized the process with your spouse.
I can help you with turning the agreement you reached with your spouse into a formal and binding separation agreement. I can often quote flat fees for such work; please feel free to contact me to discuss how I can help you.
