While divorce and separation have bad reputations, they actually can lead to happier and better functioning families overall. Every case is unique, so there is a lot to consider when embarking on this difficult and emotionally challenging process. As with marriage, there are financial consequences to divorce or separation— most importantly when it comes to taxation. If you are undergoing or planning to divorce or separate, consult Liu & Associates’ guide below to the tax implications of this very common life change.
First things first, you should update you and your spouse’s status with the Canada Revenue Association. It may seem like paperwork that can be put off for later, but it can actually benefit your economic standing. For tax purposes, a marriage or common law union is considered over after 90 days of living apart. Following this, certain credits and benefits can increase because CRA no longer calculates based on a joint income.
In most divorces and separations, assets of the family are added together and split down the middle for redistribution. Often it makes more financial sense for one partner to keep investments such as Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TSFAs) because cashing them in to split the funds means the entire amount is taxable. Keeping them invested and allowing the other partner to hold other assets like the family home can mean less tax paid by both parties. If you own two properties, each party can claim the principal residence exemption and avoid taxes on the sales of the properties.
Family law is intricate, but there is a general rule of thumb when considering the taxes on support payments due to divorce and separation. Firstly, the recipient of spousal support pays taxes on it and the payer can use the amount as a deduction against their taxes owed. Child support is different: the recipient is not taxed on the amount and the payer cannot use it as a deductible.
DEPENDENT CREDITS & BENEFITS
Unfortunately, children and other eligible dependents are often caught up in divorces and separations. While this can lead to a better life for the individual, it does complicate the credits and benefits received from the government for their care. Regardless of shared custody, only one spouse can claim the eligible dependent tax credit– on the other hand, the Universal Child Care Benefit (UCCB) can be split between both partners.
As you can see, there are many taxation issues to consider when tackling the financial outcome of a divorce or separation. Family law and tax law are independent fields, but the accountants here at Liu & Associates are prepared to answer your questions with our years of professional experience. There are exceptions to every rule, so make sure you contact or visit us today!