A Guide to Taxes After Separation or Divorce

Key Takeaways

The CRA considers a couple separated for tax purposes when they live apart at least 90 days due to breakdown of marriage or common-law relationship.

Amount for eligible dependent can be claimed by only one individual and it can not be split between the parents. In case of shared custody, the parents of the child can take turns claiming the amount.

Child support payments are not taxable for the payee and not deductible for the payer.

Spousal support payments are deductible from the payer’s income. The payee must report spousal support payments as taxable income on their return.

Divorce and separation are not only emotionally taxing but also bring about significant tax consequences for the parties involved. As couples navigate the complex process of untangling their lives, they must also grapple with the tax implications of dividing property, allocating spousal support, and restructuring family benefits. The Canadian Revenue Agency (CRA) has specific rules that govern how separated or divorced individuals report income, claim deductions, and capitalize on credits. From the division of assets to the custody of dependents, each decision carries potential tax ramifications that require careful consideration.

Reporting the Separation Date

The Canada Revenue Agency (CRA) recognizes the separation for tax purposes when a couple separates and live apart for at least 90 days due to a breakdown in their relationship. Both parties must inform the CRA of their separation after the 90-day period has passed. The notification should be made by the end of the month following the month in which the 90-day period ends. For example, if a couple separates in June, they must report the separation by July 31st. of the following month. If you filed your tax return before the 90-day period ended and that period includes December 31, you should enter your marital status as married or living common-law. Date of separation can be reported to the CRA through any of the following:

Online - You can update your marital status online using My Account.

By Phone – You can contact the CRA by phone at 1-800-387-1193 to report your separation.

By Mail - You can also notify the CRA by mail. Send a letter that includes your name, Social Insurance Number (SIN), and details about the change in your marital status. Alternatively, you can use Form RC65, Marital Status Change, although it’s not mandatory.

Eligible Dependent Credit

Also known as the Amount for an Eligible Dependent, is a non-refundable tax credit designed for single adults who are not claiming the spouse/common-law partner credit and who are responsible for the financial care of a child or a relative. In case of a shared custody, the rules can be complex. If both parents are required to make child support payments under a court order or written agreement, neither parent can claim the amount for an eligible dependant for that child. However, one parent may still be eligible to claim the amount if both parents agree that this person will make the claim. If they cannot agree, then neither parent can claim the amount for that child.

Canada Child Benefit (CCB)

In the event of a divorce, the impact on the CCB depends on the custody arrangement and the income levels of the parents. The CCB is usually paid to the parent who is the primary caregiver of the child. If the parents were receiving the CCB jointly before the divorce, the parent who becomes the primary caregiver after the divorce would typically continue to receive the benefit. The CCB can be split between the parents if they meet the eligibility criteria. The CRA defines shared parenting as each parent having the child at least 40% of the time. In such cases, the CCB may be split between the parents. The amount of CCB received is based on the adjusted family net income (AFNI). After a divorce, the AFNI for each parent will likely change, which could affect the amount of CCB they are eligible to receive.

Support Payments

The tax implications of spousal support and child support affect both the payer and the payee differently:

Spousal Support Payments:

For the Payer : Spousal support payments are deductible from the payer’s income, which can reduce the amount of income tax they owe.

For the Payee: The recipient must report spousal support payments as taxable income on their tax return.

Child Support Payments:

For the Payer : Child support payments established or changed after April 30, 1997, are not tax deductible for the payer.

For the Payee: These payments are not considered taxable income for the recipient.

Registered Retirement Savings Plans (RRSP)

In the event of a divorce, RRSPs accumulated during the marriage are considered part of the marital property and are subject to division between spouses. The value of any RRSPs accumulated before the marriage remains with the original owner, but any growth in those RRSPs during the marriage is considered part of the marital property. After separation, contributions to spousal RRSPs must cease, and the spousal designation should be removed from the RRSP account. As part of a divorce or separation settlement between spouses, RRSP assets can be transferred directly from one spouse to another using form T2220 -Transfer from an RRSP, RRIF, PRPP or SPP to Another RRSP, RRIF, PRPP or SPP on Breakdown of Marriage or Common-law Partnership, without immediate tax implications, provided the transferred amount stays in the recipient spouse’s RRSP.

Benefits

Divorce or separation can have several implications for various benefits in Canada, including the Goods and Services Tax Credit (GSTC), provincial benefits, and the Canada Carbon Rebate. In the case of GSTC, the payments may be adjusted based on the new income and family situation. Provincial benefits, such as those related to child care or low-income support, may change due to the alteration in household income and size. The specific impact would depend on the province’s regulations and the individual’s circumstances. As to Canada Carbon Rebate (CCR), after divorce or separation the parties will be filing separately as individuals. For individuals who have shared custody of child/children, they will receive payments equal to 50% of the amount they would have received if the child resided with them full-time.

Marital Home and Other Capital Assets

In case of the marital home, both parties can claim the Principal Residence Exemption (PRE) when the home is sold. PRE allows individuals to exclude any capital gains realized from the sale of their primary residence from their taxable income. Other capital property such as the non-registered investments, the family cottage, a second home, or the rental property can either be sold or transferred to a spouse on tax-deferred basis. This means that the capital gains taxes on the sale of these properties are delayed until a future date, when they are sold.

For further information please contact Taxtron Support at 416-491-0333 or visit www.taxtron.ca