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A recent BC Court of Appeal decision in Sanai which Lorne MacLean, QC recently blogged on spoke of levelling the playing field on tax laden and tax free family property in family law valuation and division cases. In the recent BC Supreme Court decision the focus remains on when if ever the taxes will be incurred to fund a family property settlement or court ordered division. Here are the key takeaway extracts:
[1] On December 16, 2016, I released Reasons for Judgement following a relatively complex matrimonial dispute. Those reasons are indexed at 2016 BCSC 2367 (the “Original Reasons”). In the Original Reasons I awarded P.T., inter alia, a $1,019,250 monetary award that reflected a twenty-five per cent interest in a strata-titled four-plex in the 300 block of West 14th Avenue in Vancouver (the “West 14th Property”) that was valued at $4,350,000.
[2] On February 6, 2017, Kryos Holdings Ltd. (“Kryos”) filed a notice of application to re-open the trial before judgement was entered, asking that I revisit the monetary award I had made in order to consider potential latent capital gains taxes on the West 14th Property. The tax would arise only if Kryos was required or chose to sell all or a portion of the West 14th Property to satisfy P.T.’s monetary award. Following a hearing on February 15, 2017 (the “February 15 Hearing”), I released Reasons for Judgement, indexed at 2017 BCSC 520 (the “Latent Tax Reasons”).
[10] In the interests of justice I re-opened the trial to address the latent capital gains tax issue; see Latent Tax Reasons at para. 14. In the Latent Tax Reasons I relied, inter alia, on S. (M.) v. M. (M.), 2015 BCSC 1599 at paras. 156-175, Jaszczewska v. Kostanski, 2016 BCCA 286 at paras. 69-70, and Maguire v. Maguire, 2016 BCCA 431 at paras. 36-37, and directed that a deduction of $53,025.63 be made from the Applicant’s initial $1,019,250 award. That amount was to be paid into an interest bearing trust account with Kryos’ lawyer pending satisfactory proof that a unit in the West 14th Property was sold and capital gains tax was incurred; see Latent Tax Reasons at para. 30. The $53,025.63 figure was derived from the calculation that P.T. had sent me following the February 15 Hearing. The $53,025.63 figure was payable, however, only “if and when” a unit in the West 14th Property was sold and capital gains tax became payable.
[11] I declined to make the order sought by Kryos which would have had an amount withheld from P.T.’s award, representing twenty-five per cent of the capital gains tax that would arise from the sale of the whole of the West 14th Property. I also made provision for a “sunset clause” or term directing that the funds be returned to P.T. within certain time frames if none of the units in the West 14th Property were sold. Furthermore, in the event that a unit in the West 14th Property was not sold within these specified time frames, P.T. would be immune from any future tax liability associated with the West 14th Property or the sale of any portion of it; see Latent Tax Reasons at para. 30.
[12] At the February 15 Hearing, P.T. had argued that if Kryos could not obtain financing to satisfy his award, then it was likely that Kryos would only sell one of the four strata units of the West 14th Property to satisfy his award while retaining the rest of the complex. I agreed and said:
[20] At trial I was told by V.T. and K.T., and by Kryos’ accountant, that the Respondent and K.T.’s two children were to receive a beneficial interest in the West 14th Property. There was no evidence at trial of any intention, imminent or otherwise, to sell the property. Furthermore, I was expressly asked by Kryos, V.T. and K.T., in their final submissions, to provide them with some period of time that would allow them to refinance the West 14th Property so that they could pay the amounts to the Respondent that he was owed.
[13] P.T. also argued that he should only be responsible for twenty-five per cent of the capital gains associated with the unit that was sold to satisfy his award because it was unlikely that the other units would be sold, and therefore, the prospect of paying capital gains tax on those units was speculative. Again, I agreed and said:
[16] … In Ouellette v. Ouellette, 2012 BCCA 145 at paras. 29, 31-32, decided under the current Family Law Act, S.B.C. 2011, c. 25, the British Columbia Court of Appeal reviewed a number of relevant authorities and confirmed that future contingent tax liabilities need not necessarily be taken into account where “it is not known when, if ever, the asset would be sold” or where those costs are “hypothetical and speculative”; see paras. 28 and 32.
…
[19] Mohajeriko v. Gandomi, 2009 BCSC 393, is perhaps the most analogous decision to the facts before me. In that case, the court considered the allocation of latent capital gains taxes for the purposes of property equalization; see paras. 121-127. The defendant’s accountant calculated that the capital gains tax on the subject property would amount to $37,750.00. The court, at para. 122, distinguished the case before it from Stein on the basis that there was no evidence that the defendant had any intention to sell the property, and therefore, any prospect of a capital gains tax was, at best, speculative.
[46] The judgment of Saunder’s J.A. [SANAI] thus identified at least two respects in which the tax liability arising from the disposition of the sale of an asset might be speculative or uncertain.
[47] The first, as in Ouellette, is where the payer of an order does not intend to sell his interest in a business asset. Conversely, in Sanai, the appellant was willing to dispose of the assets in question “immediately”. The case before me is much closer to Ouellette. I have earlier found that Kryos did not propose to sell the West 14th Property. Instead it intended to hold that property indefinitely for the benefit of the parties’ children except, possibly, to the limited extent necessary to pay P.T.’s judgment.
[48] Sanai also makes clear, however, that whether an asset must be sold does not end the enquiry. Further considerations are relevant. Importantly, “assets should be put on the same level for fairness” and for “equality of treatment”. Having P.T.’s award reduced by twenty-five per cent of the total capital gains taxes owed on the disposition of the West 14th Property would not be fair. It would have P.T. prepay, and allow Kryos to hold an amount on account of taxes, that may not be incurred for a very long time. Having P.T. pay the full amount of the capital gains tax owed on Unit 1 achieves, for reasons that I have explained, the same result and it is equally unfair.
