Tax Implications Of Divorce And Separation Canada
Tax Implications of Divorce and Separation Canada
Divorce and separation can be very costly. However, there are tax savings opportunities that can save you money
This article provides 6 tax tips on separation and divorce.
Tax tip #1 – Splitting up assets; tax implications of divorce and separation Canada
You should consider the tax cost of family assets when splitting them up upon separation or divorce.
Let’s take a practical example.
•Assume that the husband has $300,000 of RRSPs and $100,000 of non-registered investments.
•The husband and the wife jointly own the family home which has a fair market value of $400,000.
In this example, it would be wise for the wife to claim for the family home because the principal residence exemption would dictate that if the home were sold, the wife would receive the sale proceeds of $400,000 tax-free.
If the husband were to keep the RRSPs and the non-registered investments, he’s shortchanged. This is because when the RRSPs are cashed in, the whole amount would be included in the husband’s income. Additionally, upon the sale of the non-registered investments, capital gains tax would arise.
Therefore, when you are splitting up family assets it is very important to look at the after-tax cost of those assets.
Tax Tip # 2 – Do not cash in RRSPs when splitting family assets - Tax Implications of Divorce and Separation Canada
There is a special rule in the Income Tax Act that allows one spouse to transfer his/her RRSP to the other spouse upon separation or divorce. This is very helpful if you have to make an equalization payment to your spouse.
If you did not take advantage of this special tax rule, then you may end up having to cash in your RRSPs, which would be included in your income, in order to make an equalization payment to your spouse.
Tax Tip # 3 – Update the Canada Revenue Agency on your single status - Tax Implications of Divorce and Separation Canada
Make sure to update the CRA on your single status after you have been separated or divorced. The reason being is that the amount of Canada Child Tax Benefit that you receive for your children is based on family income, i.e. the combined income of you and your spouse.
If you are separated or divorced, your spouse’s income is taken out of the equation and only your income is factored in to the calculation for the Canada Child Tax Benefit that you are entitled to.
Therefore, it’s likely that you will receive an increased amount of Canada Child Tax Benefit by claiming yourself as single. You can claim single status only 11 months after the month of the divorce or separation
Tax tip # 4 – Split the ownership of multiple properties - Tax Implications of Divorce and Separation Canada
If you and your spouse own two properties (e.g. house and cottage), then consider giving one property to each spouse. The reason being is that each spouse can separately claim the principal residence exemption.
Tax Tip # 5 – Certain legal fees are tax deductible
If you have to pay legal fees to your lawyer to collect support payments, then those legal fees are tax deductible on your personal tax return. Legal fees paid to your lawyer to prepare a separation agreement or for disputes going back and forth on the split-up on family assets are not tax deductible.
Tax Tip # 6 – Claim the eligible dependent tax credit - Tax Implications of Divorce and Separation Canada
If you have more than one child and you and your spouse have joint custody of the children, then consider structuring the separation agreement such that you will be claiming the eligible dependent tax credit for one child and your spouse will be claiming the eligible dependent tax credit for the other child.
For both spouses to claim the eligible dependant tax credit, only one of the two children can receive child support payments.
Divorce and separation can be very costly. However, there are tax savings opportunities that can save you money
This article provides 6 tax tips on separation and divorce.
Tax tip #1 – Splitting up assets; tax implications of divorce and separation Canada
You should consider the tax cost of family assets when splitting them up upon separation or divorce.
Let’s take a practical example.
•Assume that the husband has $300,000 of RRSPs and $100,000 of non-registered investments.
•The husband and the wife jointly own the family home which has a fair market value of $400,000.
In this example, it would be wise for the wife to claim for the family home because the principal residence exemption would dictate that if the home were sold, the wife would receive the sale proceeds of $400,000 tax-free.
If the husband were to keep the RRSPs and the non-registered investments, he’s shortchanged. This is because when the RRSPs are cashed in, the whole amount would be included in the husband’s income. Additionally, upon the sale of the non-registered investments, capital gains tax would arise.
Therefore, when you are splitting up family assets it is very important to look at the after-tax cost of those assets.
Tax Tip # 2 – Do not cash in RRSPs when splitting family assets - Tax Implications of Divorce and Separation Canada
There is a special rule in the Income Tax Act that allows one spouse to transfer his/her RRSP to the other spouse upon separation or divorce. This is very helpful if you have to make an equalization payment to your spouse.
If you did not take advantage of this special tax rule, then you may end up having to cash in your RRSPs, which would be included in your income, in order to make an equalization payment to your spouse.
Tax Tip # 3 – Update the Canada Revenue Agency on your single status - Tax Implications of Divorce and Separation Canada
Make sure to update the CRA on your single status after you have been separated or divorced. The reason being is that the amount of Canada Child Tax Benefit that you receive for your children is based on family income, i.e. the combined income of you and your spouse.
If you are separated or divorced, your spouse’s income is taken out of the equation and only your income is factored in to the calculation for the Canada Child Tax Benefit that you are entitled to.
Therefore, it’s likely that you will receive an increased amount of Canada Child Tax Benefit by claiming yourself as single. You can claim single status only 11 months after the month of the divorce or separation
Tax tip # 4 – Split the ownership of multiple properties - Tax Implications of Divorce and Separation Canada
If you and your spouse own two properties (e.g. house and cottage), then consider giving one property to each spouse. The reason being is that each spouse can separately claim the principal residence exemption.
Tax Tip # 5 – Certain legal fees are tax deductible
If you have to pay legal fees to your lawyer to collect support payments, then those legal fees are tax deductible on your personal tax return. Legal fees paid to your lawyer to prepare a separation agreement or for disputes going back and forth on the split-up on family assets are not tax deductible.
Tax Tip # 6 – Claim the eligible dependent tax credit - Tax Implications of Divorce and Separation Canada
If you have more than one child and you and your spouse have joint custody of the children, then consider structuring the separation agreement such that you will be claiming the eligible dependent tax credit for one child and your spouse will be claiming the eligible dependent tax credit for the other child.
For both spouses to claim the eligible dependant tax credit, only one of the two children can receive child support payments.
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