Recently Separated or Divorced?
There are tax implications you should be aware of before filing your T1 return.
If you separated from or divorced your partner in the last tax year, and are preparing to file your T1 return, here’s what you need to know about reporting your split to the CRA, as well as some key things to consider.
How does the CRA defines ‘marital status’ for income tax purposes?
Spouse refers to a person you are legally married to.
Common-law partner refers to a person who is not your spouse but with whom you are in a conjugal relationship and at least one of the following conditions applies:
This person has been living with you in a conjugal relationship for at least 12 continuous months (including any period of time where you were separated for less than 90 days because of a breakdown in the relationship)
This person is the parent of your child by birth or adoption
This person has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on them for support
For tax purposes, you are considered separated when you have been living separately for a period of at least 90 consecutive days. If you reconciled before the end of the 90-day period, you are not considered as having separated at all. Divorce on the other hand, is considered valid upon the legal dissolution of the marriage.
According to the Canadian Revenue Agency’s definition, spouses and common-law partners are treated equally.
When should you notify the CRA of your separation or divorce?
The CRA should be notified as soon as possible if a couple is divorcing. However, separating couples should wait until they have been separated at least 90 days before notifying the government.
Why should you notify the CRA of your separation or divorce?
Married or living common law families qualify for a number of refundable and non-refundable tax credits that are based on the size of the ‘family net income’ which means the net income of both spouses. However, when you become separated or divorce, your net income is only based on one income, which results in an increase in refundable tax credits. Notifying the CRA ensures that the calculation of federal or provincial credits can be made without including the estranged spouse or common-law partner’s net income.
Newly separated parents and refundable tax credits
“In Canada, more than 40% of couples will divorce or separate - and, among them, about 25% will have minor children at the time of their split.”
- Canadian Revenue Agency
Working through the financial supports and the sharing of tax benefits and credits, can be daunting. Generally, we assume that the individual eligible for tax credits - like the tax-free monthly Canada Child Benefit (CCB), or the GST/HST credit - is the female parent. However, there are still a number of factors that will need to be considered. For example, if both parents share custody of the child(ren), who live with each parent half of the time, each can receive half of the CCB.
Is child support taxable?
Child support payments are not taxable which means that if you are receiving child support, you do not have to pay tax on that money. On the other hand, if you are the person paying child support, your support payments cannot be deducted on your tax return. It should also be noted that any other support payments detailed in a court order or an agreement are considered as child support if they are not specifically defined as spousal support.
Is spousal support taxable?
When a lump-sum payment is made upon the finalization of a separation or divorce, it is not taxable to the recipient and it is not deductible to the person paying it.
However, spousal support payments are taxable to the person who is receiving the payments and deductible to the person who is making the payments under the following circumstances:
The amount is receivable under an order by a court, tribunal or a written agreement, based on provincial laws.
The amounts are specific and paid to the recipient (or an agency handling collection) on a periodic basis. The timing of these payments must be outlined in the court order or agreement which can include specific purposes like rent, property taxes, educational costs, etc.,
The person receiving payments has the discretion to use the amount received as she or he wishes, although certain specific purpose payments can be made directly to a third party if this is specified in a court order or agreement.
The recipient and the payer are living separately and apart. The exception to this rule occurs if the payer is the legal parent of the child(ren) of the recipient.
To the spouse who receives the taxable spousal amount, there may be a large tax balance due at tax filing. If you are eligible, making an RRSP contribution can help reduce the net taxes owing.
What if child support payments have not been paid?
In terms of child support payments, if money is owed but has not yet been paid, it is considered in arrears. For tax purposes, all arrear payments are considered to be non-deductible child support payments until the child support is up-to-date. Once paid, all subsequent payments are then considered spousal support payments that are taxable to the person receiving them and deductible to the payer.
Are legal fees deductible?
The legal fees associated with getting a separation or divorce, or to establish, negotiate or contest the amount of support payments is not deductible. However, any legal fees incurred to enforce the pre-existing payment of support amounts, or to defend against an application for the reduction of support payments, is deductible.
Who gets to claim child care expenses?
As in normal circumstances, child care expenses are claimed by the lower-income spouse. The costs may be claimed by the higher income spouse if there is a separation for a period of at least 90 days and if a reconciliation occurred within the first 60 days after the taxation year. If reconciliation does not occur, then each spouse may claim any child care expenses they paid during the year with no adjustment for the child care expenses claimed by the other parent.
What about other federal non-refundable tax credits?
Aside from the calculations of family net income for the purposes of claiming tax credits, the breakdown of a marriage or common-law relationship will affect numerous other important financial considerations including the division of assets, pension assets and rules relating to spousal or common-law partner RRSPs.
How Blackspark can help
If you separated or divorced in the last tax year, filing your tax return will be a little more complicated now. We can help. We have the expertise and experience needed to ensure that you maximize the benefits available and get the tax deductions you are entitled to. We’re in your corner.
Sources and Resources: Government of Canada
Support Payments
Support Payments Guide
Legal Fees
Support Payments Received
