Separating has tax consequences. So does getting a divorce. Those consequences start by changing your filing obligations to the Canada Revenue Agency (CRA).
Here’s what you need to know about filing taxes when your marriage is coming to an end.
Did you know you are required to notify the Canada Revenue Agency (CRA) when you separate or get a divorce? You must do no later than thirty days after your marital status changes.
There are three ways to do it:
Incidentally, you must do this any time your marital status changes. For example, if you start a common law relationship with a partner you must use this same form to inform the CRA of your new status. This is because your tax obligations change as your marital status changes.
Filing Taxes While Separated
You must claim your status as “separated” on your tax return. If you were not separated by December 31st of that tax year then you will file as married and then file as separated on the next tax year.
Separation impacts some of your deductions.
- You can’t claim mortgage interest and property taxes separately.
- You can still deduct them separately as individual expenses.
- You can split medical expenses with a joint account.
You can file as “Married Filing Separately” so that you are only responsible for your own tax return. This keeps you from taking on your spouse’s tax obligations. In addition, only your income will be factored into your tax liability. This can be a helpful way to increase your refund or lower your payment.
To file as separated, you must be separated for 90 days or more. A separation of less than 90 days is not considered a separation for the purposes of claiming tax benefits. In addition, you must live in a separate residence. While family court will consider you separated if you move into a different room, stop sharing meals and social activities, and decouple your financial lives, the CRA only considers you separated if you are each living in a different home. The only exception is if there is a way for you to keep your living quarters self-contained, and you’d have to take extra steps to prove separate responsibilities.
Filing Taxes After the Divorce
You must claim your status as “divorced” on your tax return. If you were not divorced by December 31 of the previous tax year then you file as separated on that year and divorced on the next year.
Every part of your divorce settlement will have tax consequences.
The Tax Implications of Separation & Divorce
Your separation and your divorce will both have tax consequences.
- You can claim legal fees for collecting spousal support or child support as a deduction on your tax return. Legal fees simply for working out the divorce and separation agreements do not count, but legal fees for collecting back child support or back spousal support would.
- You must claim spousal support as income. It is taxable, just like any form of income would be taxable.
- Child support is not taxable.
- If you pay spousal support you may claim it as a tax deduction.
- Child support is not deductible.
- Only one of you may claim the credit for a child. If you have more than one child, you could each claim a different child. This is beneficial as parents may not use more than one child for the child tax credits anyway.
- You split your family assets on separation. You need to try to maximize the after-tax value of your assets.
- It is wise to avoid cashing your retirement accounts during your divorce. You can, for tax purposes, transfer a portion of your retirement accounts to your spouse, and you can do so one time tax-free. This is better than cutting a check out of your retirement account, as the full value of that withdrawal would be taxable.
- Transferring stock to a spouse may mean having to pay tax on the capital gains of that stock, not your spouse. This tax burden should be taken into consideration when contemplating whether to offer up stocks as part of the total asset package.
- When you transfer physical assets the difference in value between the current market value of that asset and the purchase value of the asset. This can be delayed with an automatic rollover provision.
- It is possible to transfer real property in a tax-free manner, so long as it is done correctly.
It is very wise to involve tax professionals in your divorce. When you divide assets it’s not just about making sure both parties walk away with an equal share. It’s also about making sure that one party’s tax obligation doesn’t cripple them when the divvying is done. Your attorney can help you work the tax insights the professional provides into your settlement negotiations.
Get Help Today
Divorce carries many financial implications. Make sure yours are being done with an eye towards your tax liabilities. Having to pay a large sum to the CRA could devalue your share of the assets! The goal after division of assets is to have both spouses end up with roughly the same amount of after-tax value after all these issues are fully accounted for.
We’ve helped thousands of clients navigate these issues, including high net worth clients, farmers, and business owners. In fact, our status as a full-service law firm often proves very useful, as we have attorneys with a backing in both business law and real estate law. We also have access to some of the finest professionals in Canada, accountants and financial planners who are well versed in the challenges that divorce can cause.
We help clients in British Columbia, Alberta, Saskatchewan, and Manitoba. We’re known for being some of Canada’s savviest negotiators and toughest litigators.
Contact Merchant Law to get started today. We’re ready to help.