A number of tax issues are raised when you separate or divorce from your spouse. By identifying these issues at an early stage, separating spouses can be better informed, and proactive about organizing the documents and information they will need to produce to the Canada Revenue Agency (“CRA”).
Below are a few high level tax issues to consider:
Notice to CRA of Separation
There is a requirement to notify CRA if parties have either: (1) been separated for 90 days in a row without a period of reconciliation, or (2) obtained a court-granted divorce order. There is a form on the CRA website entitled “Marital Status Change” that can be filled out by parties to notify the CRA of the change of their marital status.
The CRA determines whether an individual is separated by considering the factual basis of each specific case. If there is a disagreement regarding the date of separation, records showing the date of a change in name or address for utility bills, medical or dental plans or, mortgage documents can help to prove the date of separation. You may also find that the CRA asks you to produce a letter from two different “third parties” witnesses to your separation date. You can ask your family lawyer to assist you with these tax issues by producing a letter in support of your date of separation.
This link has further information to update your marital status.
Canada Child Tax Benefits
As a general rule, the CRA will look at the net income of each former spouse/partner to determine their respective entitlement to the Canada Child Tax Benefit (“CCTB”). If parents have a shared parenting regime, CRA will look at each parent’s net income to determine entitlement to the CCTB. If a parent is entitled to receive the CCTB under a shared parenting regime, they will receive 50 % of what they otherwise would have been entitled to if the child lived with them 100 % of the time.
See this website for further information.
Eligible Dependent Credit
According to the Income Tax Act, in order to be eligible for the Eligible Dependent Credit: (1) you must live with a child under the age of 18 for most of the year, (2) you must not be making any support payments for the child, and (3) no one else can claim credit for that child. In a shared parenting regime, parties can agree to alternate the years that they are able to claim this credit.
Tuition, Education and Textbook Credit
If you are paying for your child’s tuition and/or textbooks and your child does not earn sufficient income to make use of this credit, he or she (or “your child”) can either elect to carry it forward for a future year, or appoint a parent to whom to transfer the credit for their benefit. Only one parent can claim this credit. To fill out the necessary documentation visit this link.
No capital gains tax is payable by the owner on the sale of a property that is a “principal residence”. In order to determine whether a property is a principal residence, CRA must be satisfied that the owner has “ordinarily inhabited” the property and has not used that property to gain or produce income. For further information visit this link.
Spousal support monthly payments are tax deductible for the payor and taxable to the payee. In order to obtain the tax benefits of a monthly spousal support payment, you should fill out Form T1558 and provide CRA with a copy of your written agreement or court order that outlines your monthly spousal support obligation. A lump sum support payment is generally not tax deductible unless it is a “qualifying retroactive lump-sum payment”. A qualifying retroactive lump- sum payment refers to a payment that is (1) more than $3,000, (2) paid by a former spouse or common law partner, (3) applies to missed support payments for one or more previous years as set out in a written agreement or court order.
As a general rule, a separating spouse may transfer RRSPs to his or her spouse without any tax consequences at the time of transfer. However, the RRSPs will be taxable at the time the receiving spouse elects to withdraw from the RRSPs.
Deduction for Legal Fees
Legal fees incurred by a party to enforce a “pre-existing right” are tax deductible. A pre-existing right refers to matters where entitlement has already been established. For example: collecting late spousal or child support payments, or changes to the child and spousal support payments. Legal fees incurred by the payer to establish child custody or to obtain a divorce are not tax deductible. Refer to this link for further information about these tax issues: