Tax Tip Thursday

Tax Impacts of Divorce

This week we are going to talk about an unfortunate topic, but it is one that can have a significant impact on people and their taxes… Divorce.

This week’s post is for Margaret.

There are a few ways that you can be impacted with respect to your taxes, with spousal and child support being the most obvious. But there is more!

Spousal Support

If there is an amount stated in the separation agreement and/or a court appointed amount, it is taxable for the receiver and tax deductible for the payor. It is important that it is per an agreement/court order, or it is neither taxable nor deductible!

For example, if Anne and Jim divorce and the agreement states that Jim is to pay Anne $500 per month in spousal support, this would be tax deductible to him at the end of the year and Anne would have to pay taxes on it as income. However, if it was not written in any agreement/court order that Jim would pay Anne and he agrees to do it anyway, he will not receive a tax refund for the amount and Anne will not pay taxes on the amount. Make sure you document this aspect of a divorce!

Child Support

Child support is neither taxable nor tax deductible! However, it can affect the deductibility of the child(ren) as eligible dependents.

So, what is an eligible dependent and how do you get a deduction?

There is a non-refundable tax credit that is available to people who have children and do not have a spouse. In short, it amounts to approximately a $2,000 reduction in taxes. The reason it is of interest to people who have split up is because of the child support payments! There are two secnarios:

  1. If only one person pays child support, that person cannot claim a child as an eligible dependent.
  2. If both people are paying child support, then there is an opportunity for each person to claim a child (if there are multiple), or even for one child if there is an agreement.

Canada Child Benefit (CCB)

Whoever has the child the most will receive the CCB based on their individual income.

If the child shares their time about equally between the parents, then both parents are considered to have shared custody for the purposes of the CCB:

  • each parent must immediately tell the CRA of their new custody agreement;
  • the CRA will calculate the amounts each parent will get separately, using their respective adjusted family net incomes;
  • each parent will get exactly 50% of what they would have gotten if they had full custody of the child, based on the above calculation; and
  • the CRA will not split the amount using other percentages, or give the full amount to one of the parents.

Legal Bills

As the recipient of support payments, you can deduct legal and accounting fees incurred in the following circumstances:

  • to collect overdue support payments owing;
  • to establish the amount of support payments from your current or former spouse or common-law partner;
  • to establish the amount of support payments from the legal parent of your child (who is not your current or former spouse or common-law partner) where the support is payable under the terms of a court order; or
  • to try to get an increase in support payments.

As the payor of support payments, you cannot claim legal and accounting fees for anything to do with your separation, divorce, custody, or support payments.

Canada Pension Plan (CPP)

The Canada Pension Plan (CPP) contributions you and your spouse or common-law partner made during the time you lived together can be equally divided after a divorce or separation. This is called credit splitting.

There is a form and lots of calculations about the earning period, but in short it is possible and it is worth applying if you think you qualify. Know that your spouse will definitely be contacted to confirm the information for purposes of the calculations, and they will have the opportunity to challenge the decision.

You can hire someone to assist you or you can take it on yourself. Click here for a link to the Canadian Government website on the matter.

RRSPs and TFSAs

RRSPs and TFSAs can both be transferred between spouses splitting up tax-free and without impacting the contribution room for either one of them.

We Can Help With All of This!

As you can see, this can be a very complicated and challenging topic at the best of times, let alone if you’re going through something as harrowing as a divorce. We have seen it all before, and we are happy to help! Don’t forget that our fees might be tax deductible for you. If you need our help, please don’t hesitate to book an appointment.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.