Divorce and separation can have significant financial and tax implications in Canada. Understanding these impacts is crucial for managing your tax responsibilities with the Canada Revenue Agency (CRA). In this guide, we explore the key tax considerations when navigating divorce or separation.
1. Marital Status Change
Reporting to the CRA: When you separate or divorce, you are required to inform the CRA of your change in marital status. This update affects various tax benefits and credits. You should report your separation after living apart for 90 days, and if you later reconcile, you must notify the CRA again.
Filing Status: Canada does not have a separate tax filing status for divorced or separated individuals. However, your marital status can affect the benefits and deductions you qualify for.
2. Child Support and Spousal Support
Child Support Payments:
Payer: Child support payments are not tax-deductible for the payer.
Recipient: Child support payments are not considered taxable income for the recipient.
Spousal Support Payments:
Payer: Spousal support payments are tax-deductible for the payer if they are made according to a court order or written agreement.
Recipient: Spousal support is considered taxable income for the recipient, and they must report it on their tax return.
3. Tax Credits and Benefits
Canada Child Benefit (CCB): The CCB is a tax-free monthly payment that helps eligible families with the cost of raising children under 18. After a separation or divorce, the CRA will reassess your eligibility and payment amount based on your new family income.
GST/HST Credit: Your eligibility for the GST/HST credit, a tax-free quarterly payment that helps individuals and families with modest incomes offset the GST/HST they pay, may change depending on your new marital status and income level.
Child Care Expenses: Generally, the parent with whom the child resides can claim child care expenses. However, if custody is shared or both parents contribute to the costs, special rules may apply.
Eligible Dependant Credit: If you are single, separated, divorced, or widowed, and you support a child under 18 or another eligible relative, you may be eligible to claim the Eligible Dependant Credit. This credit is similar to the spousal amount but is only available to those who do not have a spouse or common-law partner.
4. Division of Assets
Capital Gains and Losses: When dividing assets like investments or property, any capital gains or losses realized from the transfer may be subject to taxes. However, transfers between spouses or former spouses due to separation or divorce can often be done on a tax-deferred basis, meaning there is no immediate tax impact.
Principal Residence Exemption: If the family home is sold as part of the divorce settlement, the principal residence exemption may apply, allowing you to avoid paying capital gains tax on the sale. However, complications can arise if one spouse continues to live in the home or if the property is no longer considered the principal residence.
5. Pension Income Splitting
Impact on Retirement Planning: Divorce or separation can significantly affect your retirement planning, especially if you were previously splitting pension income with your spouse. After separation, pension income splitting is no longer available, which may result in higher taxes for one or both former spouses.
6. Legal Fees
Deductible Legal Fees: Legal fees related to the collection of spousal or child support payments are tax-deductible. However, legal fees incurred solely for the purpose of obtaining a divorce or negotiating a separation agreement are not deductible.
7. Impact on RRSPs and TFSAs
RRSPs: RRSPs can be divided without immediate tax consequences if done according to a court order or separation agreement. However, any withdrawals made as part of the division will be taxable.
TFSAs: Similar to RRSPs, TFSAs can be transferred between spouses or former spouses tax-free as part of a divorce or separation agreement, without affecting either person’s contribution room.
Conclusion
Divorce or separation brings about significant changes—not only emotionally but financially, especially when it comes to taxes. Understanding how your new marital status affects your tax obligations and benefits is essential. Consulting with a tax professional or financial advisor can help ensure you are taking full advantage of the tax provisions available to you under Canadian law and managing your financial situation effectively during this challenging time.
