Tax Implications of Divorce and Separation

Divorce and separation can be a very difficult time for all parties involved, especially in the beginning. However, as difficult as it can be, there are critical tax implications that individuals should be aware of.

The following information is designed to help make things easier down the road:

• Call CRA and let them know as soon as your marital status changes. It can affect the amount of child tax benefit and/or GST/HST credits to which you’re entitled.

• CRA will only consider you separated once you’ve been living separate and apart for a period of 90 days or more due to a breakdown in a relationship. CRA generally does not consider you separated until separate residences are being maintained by both parties. Be prepared to prove to CRA that you are indeed maintaining a separate residence. Keep copies of leases signed, Hydro bills in your name, change of addresses with insurance companies, etc. If you’re unable to prove that you’re maintaining a separate residence, they won’t accept your claim of separation for purposes of child tax benefit, GST/HST credits, or the eligible dependent claim.

• CRA may consider you living separate and apart while living in the same residence if that residence has separate living quarters self-contained in the same household. These types of living arrangements are more difficult to prove to CRA, so be prepared to prove separate parental and financial responsibilities.

• If you’re in a situation where a child splits their time between both parents, the parents must agree on who will claim the child on their tax return. If the parents cannot agree, and both try to make the claim, CRA will disallow the claim on both sides and not allow either parent to make the claim. Putting this information right into the separation agreement is a good way to avoid these problems down the road when there is shared custody.

• If there are two children, each parent may be able to claim a child unless one parent must pay child support to the other. In this case, only the parent not paying support can claim the child(ren) - shared custody/eligible dependent. In cases where each parent is required to pay support, and the higher support payer is paying a "net" amount to the lower support paying spouse, it is critical to ensure the separation agreement specifies this point.

• If you pay legal fees in order to receive spousal or child support, the portion of fees relating to this is deductible for tax purposes. You can ask your lawyer to keep the fees relating to support separate from those relating to separation agreements, divorce proceedings, etc. Or, your lawyer can prepare a letter for you stating that a certain percentage of legal fees were attributable to spousal and child support issues. Child support payments made are neither taxable to the recipient nor deductible by the payer, unless:

• The child support agreement or court order was entered into prior to May 1, 1997, and hasn’t been altered since that time. In these cases, the payments are taxable to the recipient and deductible by the payer.

• If both parties would like to change this, they can file a T1157 (election for child support payments) in which the parties can elect for the child support payments to not be taxable/deductible. Once this election has been accepted it cannot be revoked.

This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.

If you are looking for Tax Services, Crowe MacKay provides personalized support. Our tax professionals will help you maximize tax-planning opportunities and ensure the minimum amount required by law is paid.