An Ontario equalization payment settles property rights, so it is not a "support amount" under the Income Tax Act and the support tax rules do not apply to it. The tax questions come from the assets used to pay it. Capital property and registered plans can usually move between separated spouses without immediate tax, and net family property already deducts applicable contingent tax (Family Law Act, s. 4(1.1)). Speak to a tax professional before you sign.
How tax fits into equalization, step by step
Equalization is explained on our property division page and in our guide to how property is divided in Ontario. Tax enters at three points: when each spouse's net family property is calculated, when assets change hands to pay the equalization, and later when the receiving spouse sells or withdraws what they received.
- Deduct contingent tax in the calculation. The debts deducted in net family property include "any applicable contingent tax liabilities in respect of the property" (Family Law Act, s. 4(1.1)). An RRSP, a rental property with an accrued gain or shares in a private company each carry tax that would be paid on withdrawal or sale. Whether and how much to deduct is often argued with evidence.
- Know what the payment is not. The Income Tax Act defines a "support amount" as an amount payable "as an allowance on a periodic basis for the maintenance of the recipient" (s. 56.1(4)). A payment that settles property rights does not meet that description, so the payor does not deduct it as support and the recipient does not include it as support. Our page on how support is taxed covers the support side.
- Transfer capital property at tax cost where possible. When capital property is transferred to a former spouse "in settlement of rights arising out of their marriage", the transferor is generally deemed to dispose of it at its tax cost and the transferee takes over that cost, unless the transferor elects otherwise in their return (s. 73(1) and (1.01)(b)). The gain is postponed, not erased: it falls on the receiving spouse when they later sell.
- Move registered plans directly. RRSPs and RRIFs can be transferred to the other spouse's plan, and TFSAs to the other spouse's TFSA, while living separate and apart under a court order or written separation agreement, without the transfer itself being taxed (ss. 146(16)(b), 146.3(14) and 207.01(1)). Our page on RRSPs, TFSAs and investments explains each rule.
- Check attribution. Income from property transferred between spouses is normally attributed back to the transferor, but not for the period the spouses live separate and apart because of the breakdown (s. 74.5(3)(a)). Capital gains attribution can be turned off by a joint election filed with the transferor's return (s. 74.5(3)(b)).
- Protect the receiving spouse from the payor's tax debts. A spouse who receives property for less than fair market value can be made jointly liable for the transferor's tax debts (s. 160(1)), but not for transfers under an order or written separation agreement made while separated because of the breakdown (s. 160(4)). Our page on debts on separation explains how existing tax debts are handled.
Tax on the common ways of paying equalization
| Payment method | Immediate tax on the transfer? | Who carries tax later | Income Tax Act provision |
|---|---|---|---|
| Cash from savings | No tax on the payment itself as a property settlement | Nobody, on the cash | Not a support amount, s. 56.1(4) |
| Transfer of shares, a cottage or other capital property | Generally no, unless the transferor elects out | Receiving spouse, on a later sale, at the original tax cost | s. 73(1) and (1.01)(b) |
| RRSP or RRIF transfer to the other spouse's plan | No, if direct and under an order or written separation agreement | Receiving spouse, on withdrawal | ss. 146(16)(b) and (c), 146.3(14) |
| TFSA transfer to the other spouse's TFSA | Treated as a qualifying transfer if the conditions are met | Depends on the TFSA rules | s. 207.01(1) |
| Selling an asset to raise cash | Yes, any gain is taxed to the seller | Seller | General capital gains rules; principal residence rules for a home, s. 40(2)(b) |
| Pension lump sum transfer | Moves into a locked-in plan | Receiving spouse, on later payments | Pension Benefits Act, s. 67.3; see our pensions page |
What changes the answer
- Whether the contingent tax is "applicable". Section 4(1.1) allows only applicable contingent tax to be deducted. The likelihood and timing of a sale or withdrawal affect how much, so evidence matters.
- Electing out of the rollover. A transferor can elect not to have s. 73(1) apply (s. 73(1)), for example to use their own losses. That shifts the gain into the transferor's year of transfer, so the settlement should reflect who bears it.
- The family home. A gain on a principal residence can be reduced or eliminated by the principal residence formula in s. 40(2)(b). Where two homes are involved, such as a city home and a cottage, which one is designated matters. Our page on buying out your spouse's share of the home covers the transfer itself.
- Common-law partners. The Income Tax Act rules above use "spouse or common-law partner", so they can apply to common-law couples, but Ontario's equalization does not; common-law partners settle property by agreement or claims such as unjust enrichment.
- Timing and paperwork. Several rules need the transfer to be made under an order, judgment or written separation agreement while the spouses live separate and apart. Moving assets before the agreement is signed can lose the benefit.
- Support at the same time. If spousal support is also being negotiated, a lump sum labelled as support is treated differently from periodic support. Our page on lump sum spousal support explains the difference.
A worked example
For example, imagine Farah owes Ben a $150,000 equalization payment. This is a hypothetical with simplified figures. She has three ways to pay:
- Cash from a high-interest savings account: no tax on the transfer, and Ben receives $150,000 he can spend.
- Shares of a public company worth $150,000 with a tax cost of $60,000: under s. 73(1), Ben takes them at the $60,000 cost. If he sells at $150,000, the $90,000 gain is his to report. Those shares are worth less to Ben than $150,000 in cash.
- An RRSP transfer: $150,000 moved directly into Ben's RRSP is fully taxable when he withdraws it. At an assumed 35 percent rate, it is worth about $97,500 after tax.
If the net family property calculation already deducted the contingent tax on Farah's shares and RRSP, paying Ben with those assets at their full face value could leave him short. A fair settlement adjusts the amount so that each spouse bears the tax that was assumed in the calculation. The rate and numbers are invented; a tax professional should confirm the real figures.
Common mistakes with tax and equalization
- Treating every dollar as equal. Cash, shares with gains and RRSP money each carry different tax.
- Cashing out an RRSP to pay. A withdrawal is taxable income (s. 146(8)); a direct transfer under s. 146(16)(b) usually is not, at the time of transfer.
- Labelling a property payment as support. The tax result follows the substance and the definitions in s. 56.1(4), not the label alone.
- Transferring before the agreement is signed. Several provisions require an order or written separation agreement.
- Forgetting the joint election. The election under s. 74.5(3)(b) has to be filed with the transferor's return.
- No tax advice. A short review by an accountant before signing is often far cheaper than fixing a mistake later.
What to do this week
- List each asset with its current value and its tax cost (what was paid for it, adjusted for tax purposes).
- Ask your accountant for the estimated tax on selling or withdrawing each asset.
- Identify which assets could be transferred rather than sold.
- Check whether either of you owes tax to the Canada Revenue Agency now.
- Do not move registered funds until the agreement or order is signed.
- Book a free consultation to match the payment method to the tax picture before you make or accept an offer.
Frequently asked questions
Do I pay tax on an equalization payment I receive?
Not as support. An equalization payment is a property settlement, not a periodic allowance for maintenance, so it is outside the support rules in s. 56.1(4). Any tax comes later, from the assets you receive, when you sell or withdraw them.
Can the payor deduct the equalization payment?
No support deduction is available for a property settlement, because the support deduction rules depend on the definition of a support amount (s. 56.1(4)).
Does transferring the house to my spouse trigger capital gains?
A transfer of capital property to a former spouse in settlement of marriage rights generally happens at tax cost unless the transferor elects otherwise (s. 73(1)). Whether a gain exists at all on a home also depends on the principal residence rules (s. 40(2)(b)).
What if my spouse owes the Canada Revenue Agency money?
Property received under an order or written separation agreement while separated because of the breakdown is protected from joint liability for the transferor's tax debts under s. 160(1), by s. 160(4).
Is the contingent tax always deducted?
Only where it is "applicable" (Family Law Act, s. 4(1.1)). Evidence of likely sale or withdrawal timing usually decides how much.
Where do I start if the numbers are large?
Our page on high-asset separations sets out the disclosure and valuations usually needed, and our guide to how an equalization payment is paid covers the payment options.