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DIVORCE AND TAXES
Canada Revenue Agency (CRA)
During and following a divorce,
your tax situation changes significantly.
Here are the most commonly asked questions.
Divorce and Taxes: When does Canada Revenue Agency consider you separated?
Canada Revenue Agency (CRA) considers you separated for tax purposes, ONLY when you live in separate locations and apart from your spouse or common‑law partner for more than 90 days or more. This is different from the Family Law Act which does not require you to be living in different homes to be considered as “separated.” Living apart for less than 90 days is not considered a separation by CRA for the purpose of Child and Family Benefits when it comes to divorce and taxes. Once you have been living apart for 90 days, the effective day of your separated status, for tax purposes, is the day you started living separate and apart.
Can we live in the same house and be considered separated?
Even though it is legally possible to be “separated” and still living in the same house CRA, will not consider a separation to have occurred if you continue to live together in the same household. CRA has different standards when it comes to divorce and taxes, as compared to the legal system.
An exception to this may occur when separate living quarters are self‑contained in the same household. However, if you reside in the same household and continue to share parenting and financial responsibilities, CRA will not consider a separation to have occurred for the purpose of dealing with the Canada Child Tax Benefit or Goods and Services Tax/Harmonized Sales Tax (GST/HST).
The Top 3 Divorce Mistakes People Make
1. Hiring a lawyer before understanding all their negotiation options
2. Succumbing to emotions at the expense of their financial future
3. Not starting with a smart, legal and financially savvy go-forward plan
Divorce and Taxes: How to Transfer Assets?
When you and your spouse divide up your real estate, savings, investments and pensions, this is called the division of assets. Paying your spouse their half of the assets is called an equalization payment and an asset transfer.
Am I Taxed on Asset Transfers?
Typically cash for equalization payments are not taxed during divorce because it is considered as money that you have already paid tax on. Cash is king, as they say. But when you transfer other a possessions such as a car or investments for example, they would normally be taxed at the difference between the current market value and the what you initially paid for them.
However, during a divorce asset transfer there is a strategic financial option that allow you do use what’s called an automatic rollover provision that will delay any taxation on the transfer. Keep in mind, this doesn’t mean you will never be taxed on that asset, it simply means that a transfer done as part of the separation agreement will be temporarily exempt for now.
The transfer of assets is probably one of the biggest reasons that you want to involve a financial professional who works specifically with divorce. Find out more about a certified divorce financial analyst.
Divorce and Taxes: Support
Am I Taxed on Child Support?
Child Support payments are not taxed… not taxed as income for the one who receives it nor tax deductible on the one who pays it. However this does not mean that there are not savvy financial situations that can be delved for your specific situations.
Involving a Certified Divorce Financial Analyst (“CDFA”) with your personal situation, means that they can check for deductions or tax credits related to Special and Extraordinary Child Care expenses.
Am I Taxed on Spousal Support?
Yes. When it comes to paying Spousal Support, there are tax implications everywhere for everyone. Spousal Support also comes with lots of wiggle room to be able to create savvy financial solutions. There are options like periodic spousal support payments (monthly) and a lump sum payment, or even options in between.
Periodic (i.e. monthly) payments are taxed as extra income for the recipient and are a deduction for the one who pays. Now think about this… this means that depending on how much you pay or receive, you might be bumped into a different tax bracket.
At the same time, lump sum payments are not taxable or deductible if and only if the support payments are made according to a properly prepared separation agreement. Again the importance of a Certified Divorce Financial Analyst who can help you to maximize and take advantage of the tax implications of support payments.
Lastly beyond Taxes never forget that the amount of support paid or received can have detrimental affects on that person’s ability to qualify for a mortgage. For more information, please see Gail’s Guide to Spousal Support.
Is Divorce Taxed?
Do I have to pay Land Transfer Tax?
The Unofficial Rules of Divorce:
- Divorce gets prickly, even in the most amicable situation
- It’s often less about the legalities and more about the money
- People make expensive mistakes because they don’t make a plan
- Before you do anything, understand your rights, obligations & complexities
Will I be TAXED on RRSPs?
How will marital status affect my taxes?
If your marital status changes, be sure to let the Canada Revenue Agency know, as this may change the way your divorce and taxes are handled. For example, an update in your marital status may affect the amount of UCCB (Canada Child Benefit) and/or GST/HST credit to which you are entitled.
If you have registered with their “My Account” service, you can view the marital information CRA has on file for you and you can change your information online. If you are not registered online, inform CRA of your new status and the date of the change in a letter or by completing form RC65, Marital Status Change.
How is Universal Child Care Benefit (UCCB) dealt with in a Divorce?
If you or your new spouse or common-law partner have children who are residing with you, CRA will move all the children to the female parent’s account. If you are married or living common-law with a person of the same-sex, one of you will receive the UCCB for all the children. To continue receiving the UCCB, you and your spouse or common-law partner have to file a tax return every year, even if you have no income to report.
How is the GST/HST Credit dealt with in Divorce?
If you did not apply for the GST/HST credit on your tax return and your status is now separated, widowed, or divorced, you can apply now by writing a letter to your tax centre. Once they review your request, they will send you a GST/HST credit notice advising you of the amount of your GST/HST credit.
I've never managed the money...
How do I plan for MY future?
NOUN - The fear that one will become financially destitute after a divorce.
Working Income Tax Benefit (WITB) Advance Payments:
If your marital status has changed, you will need to file a new Working Income Tax Benefit (WITB) Advance Payment application. If you do not file a new WITB Advance Payment application, your WITB advance payments will be stopped until a new application is received. The application deadline date is August 31.
If you receive your benefits by Direct Deposit, please inform CRA if your information needs to be modified. This is to prevent benefits from being deposited into the wrong bank account. If you are not on Direct Deposit, you may want to consider registering.
HAVE YOU CONSIDERED
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