Key Strategies to Reduce Tax Burdens During Divorce
Divorce brings significant financial changes, and tax implications are often not considered enough during the process. Asset division and support payments can create new tax burdens, but strategic planning can help reduce the consequences.
Understand The Tax Treatment Of Spousal and Child Support
- Spousal Support: Court-ordered or written-agreement spousal support payments are tax-deductible for the payer and taxable income for the recipient. Structuring the payments properly can help everyone to optimise their tax situation.
- Child Support: Child support payments are not tax deductible nor taxable. This rule is to prevent the shifting of tax burdens between the parents.
Divide Assets Strategically
Some asset transfers during divorce can trigger tax consequences.
- Principal Residence Exemption: If selling the family home, ensure it qualifies for the principal residence exemption to avoid the capital gains tax.
- Registered Retirement Savings Plans (RRSP) Transfers: Assets transferred between parents’ RRSPs under a divorce can be done tax-free should they follow the Canadian Revenue Agency’s (CRA) guidelines. Withdrawals in the future will be taxed, however.
- Investment Accounts: Transferring investments like stocks and mutual funds can trigger the capital gains tax when they are sold. Properly structuring asset division can reduce the tax liabilities.
Plan For The Tax Impact of Lump-Sum Vs. Monthly Payments
- Lump-Sum Spousal Support: Lump-sum spousal support is not tax-deductible for the payer nor taxable income for the recipient, unlike periodic payments.
- Pension and Retirement Accounts: If dividing pension assets, consider putting them into another tax-deferred account rather than withdrawing the funds, as the latter could result in heavy tax penalties.
Maximize Tax Credits And Benefits
- Canada Child Benefit (CCB): In shared custody arrangements, parents can split CCB payments. Primary caregivers, however, can claim the full amount.
- Eligible Dependant Credit: A single parent who primarily supports a child, can, in some instances, be eligible for this tax credit, which reduces their taxable income.
- Medical Expense Credit: If a divorce-related legal or medical expense is incurred, such as therapy for children, some of those costs may be tax deductible.
Partner with Professionals to Reduce Divorce Tax Consequences
Consulting a family lawyer, accountant, or financial planner can ensure that asset division, support payments, and tax filings that occur before, during, and after divorce are optimised for your long-term financial stability. Having expert guidance, while itself an expense, can help you to avoid costly mistakes and maximise benefits.
While divorce can have some significant tax implications, careful planning, and understanding the process as well as your options can protect your financial future. Structuring spousal support correctly, dividing assets wisely, and leveraging tax credits can make a significant difference in your post-divorce financial outlook.
INB Family Law LLP has a team of dedicated professionals ready to walk you through whatever stage of the divorce process you may be in, or other family law matters entirely. Book a consultation today.
