As we head into tax season many of our clients will be sitting down to organize their taxes. When going through a separation or divorce from your spouse, there are a number of tax issues that should be considered. By identifying these issues at an early stage, separating spouses can be better informed, and proactive about organizing the documents and information that 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:
- been separated for 90 days in a row without a period of reconciliation, or
- 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 an issue of contention between your spouse regarding the date of separation, it is valuable to show receipts to show a change in name or address for the utility bills, medical or dental plans, mortgage papers that can help to evidence 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 producing a letter in support of your date of separation. The following link has further information to update your marital status: http://www.cra-arc.gc.ca/bnfts/mrtl/menu-eng.html
Canada Child Tax Benefits
As a general rule, the CRA will look at the parties' 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 lives with them 100 percent of the time. See the CRA website for further information here: http://www.cra-arc.gc.ca/bnfts/ccb/menu-eng.html
Eligible Dependent Credit
According to the Income Tax Act, in order to be eligible for the Eligible Dependent Credit you must:
- live with a child under the age of 18 for most of the year,
- not be making any support payments for the child, and
- no one else can claim credit for that child.
In a shared parenting regime, parties can agree to alternate the years 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, they can either elect to carry it forward for a future year, or appoint a parent to transfer the credit for their benefit. Only one parent can claim this credit. To fill out the necessary documentation visit the following link: http://www.cra-arc.gc.ca/E/pbg/tf/t2202a/README.html. The 2017 federal budget proposes to make tuition credits available for occupational skills courses outside of a college or university setting.
Parties will not pay any capital gains tax on the property that is the "principal residence" of the parties. In order to determine whether a property is a principal residence, CRA looks to see if the parties have "ordinarily inhabited" and have not used that property to gain or produce income. If capital property is transferred between spouses or former spouses, there will be no capital gains arising because of the spousal roll over exemption out in section 73 (1) of the Income Tax Act. For further information visit: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/rsdnc/menu-eng.html
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. Lump sum support payments are 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, separating spouses may transfer RRSPs to their 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 on the RRSPs.
Deduction for Legal Fees
Legal fees incurred by a party to exercise a "pre-existing right" are tax deductible and can be claimed on Line 221. 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 used to establish a parenting schedule, custody or to obtain a divorce are not tax deductible. In the event you attended court and received costs for establishing a "pre-existing right, the claim must be reduced by the sum of costs you were awarded. In the event the costs relate to a pre-existing right in a future year, those costs must be included in your income for that future year. Refer to the following links for further information: