Tax Liabilities are Family Debt

CRA Debt and Family Debt: Whose responsible?

A spouse’s CRA debt can be a significant issue in separation and divorce and a recent BC Supreme Court Decision of Neely v. Neely, 201F9 BCSC 610 found both spouses liable for tax debt incurred during the relationship.

Under section 86 of the Family Law Act family debt includes any financial obligation incurred during the relation in either spouses name. This includes credit card debt, car loans and CRA debt. This section was recently applied by the court in Neely. In Neely, a husband participated in a tax shelter during the marriage and had been subsequently reassessed for $400,000, which he argued, was family debt. The exact amount tax liability was still unknown. The wife claimed the debt was not family debt as she had been unaware of the tax shelters and the husband had controlled the family finances.

In Neely, a husband participated in a tax shelter during the marriage and had been subsequently reassessed for $400,000, which he argued, was family debt. The exact amount tax liability was still unknown. The wife claimed the debt was not family debt as she had been unaware of the tax shelters and the husband had controlled the family finances.

The court found although the CRA debt was entirely in the husband’s name, the benefit of the tax shelter largely went into the family finances. Citing the Supreme Court of Canada in Stein v. Stein, 2008 SCC 35 , the court held the tax liabilities incurred during the parties’ relationship are presumptively family debt that each party is responsible for. The court also refused to unequally divide the family debt in her favour under section 95 of the Family Law Act on the basis it would not be significantly unfair to split it equally because the wife benefited from the tax savings generated for the family during the relationship.

The court ordered $400,000 in proceeds from the sale of the family home held back pending the CRA case with any surplus being divided equally.

If you are going through a divorce or separation and need legal advice contact us or give us a call at 604.264.5550