During and following a divorce, your tax situation changes significantly. Here are a few of our most commonly asked “divorce and taxes” questions:
How can divorce affect my taxes?
There are real consequences attached to the transfer of assets between spouses when they get divorced. Not all assets are created equally, and you need to be aware of how Canada Revenue Agency (“CRA”) treats each of them if you want the most financially savvy separation agreement:
Cash settlements for equalization payments on divorce are not taxed. Cash is king, as they say. When you transfer other assets, a car or investments, for example, they would normally be taxed at the difference between the fair market value and the adjusted cost base. However, during an asset transfer in divorce the spouses have the option of using an automatic rollover provision that delays any taxation on the transfer. Keep in mind, this does not mean you will never be taxed on a sale or transfer of that asset, it simply means that a transfer done as part of the separation agreement will be temporarily exempt.
Child Support payments are not taxable on the recipient spouse or deductible by the payor spouse. However, it would be wise to speak with a financial professional or Certified Divorce Financial Analyst (“CDFA”) about your situation, as there may be deductions or tax credits related to Special and Extraordinary Child Care expenses. Please see Gail’s Guide to Child Support for more information (add link).
It is important to note the difference between periodic spousal support payments and a lump sum payment. Periodic (i.e. monthly) payments will be taxable on the recipient and deductible for the payor, while a lump sum payment is not taxable or deductible. However, this is only the case when the support payments are made according to a separation agreement between the spouses. While many people try to take advantage of the tax implications of periodic payments, the amount of support 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 (add link).
Keep in mind, all payments not specifically declared as spousal support will generally be considered to be child support and will not be tax deductible.
Land transfer tax is payable on every single transfer of land in Ontario, with very limited exceptions. Fortunately, one of those exceptions is the transfer of the home between former spouses. This exception only exists when the transfer is compliance with a written separation agreement. Don’t be stupid, do it right and get your separation agreement done properly to avoid the land transfer tax. For more information, please see Gail’s Guide to the Matrimonial Home (add link).
Don’t forget to designate your new home as your principal residence, as both spouses can now have a principal resident since they are two distinct family units.
RRSP’s can be transferred from one spouse to the other without any tax consequences as long as they are transferred as part of a separation agreement and they remain in the recipient spouse’s RRSP. Don’t forget to sign and file the required T2220 form with CRA along with a copy of your written separation
When it comes to Divorce and Taxes, when does Canada Revenue Agency consider you separated?
CRA considers you separated when you live separate and apart from your spouse or common‑law partner for a period of 90 days or more due to a breakdown in your relationship. A separation of less than 90 days is not considered a separation for the purpose of Child and Family Benefits when it comes to divorce and taxes. Once you have been separated for 90 days, the effective day of your separated status is the day you started living separate and apart.
Can we live in the same house and be considered “separated” by CRA?
Even though it may be legally possible to be separated and still live in the same house CRA will likely not consider a separation to have occurred if you continue to live together in the same household. The 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 administering the Universal Canada Child Benefit (CCB) or Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit legislation.
How will a change in my marital status affect my divorce and 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 CCB 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.
What is the Universal Canada Child Benefit (CCB)?
The CCB is a monthly, non-taxable payment that is administered by the CRA. The amount that an individual will qualify for is based on the number of qualified children and the age of the children, as well as the adjusted net family income from the previous year.
The individual who is primary responsible for the care and upbringing of the child will be eligible to apply for the Canada Child Benefit. Regardless of what you say about the benefit in an agreement, CRA will follow the Income Tax Act and will require that the individual primarily responsible for the children apply for and receive the credit. As a norm, only one parent can claim the CCB. However, it would be wise to speak with a financial specialist or CDFA, as the CRA may split the benefit in a shared custody arrangement by giving each parent 50% of the entitlement.
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.
Can I apply for a GST/HST credit?
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.
Do I need to file a Working Income Tax Benefit (WITB) Application?
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.
Will a change in my marital status affect my Direct Deposit?
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.