Divorce affects your tax obligations. Changes in marital status can influence tax credits, deductions, and liabilities. Understanding the implications can help to avoid unexpected financial surprises.
After a divorce or separation, you must update your marital status with the Canada Revenue Agency (CRA). You are considered separated for tax purposes if you and your spouse have lived apart for at least 90 consecutive days due to a breakdown in the relationship. Once you become legally divorced, you must file as a single taxpayer in the following tax year.
Spousal Support
Paying spousal support under a court or written agreement is tax-deductible for the payor and considered taxable income for the recipient. lump-sum payments on the other hand, are not tax-deductible.
Child Support
Child support payments are not tax-deductible for the payor, and also not taxable income for the recipient, unlike spousal support.
Transfers between spouses to resolve issues of property division are usually tax-free at the time of separation, but there can be future tax consequences:
Principal Residence Exemption
Selling the family home will lead to capital gains tax unless it qualifies as your principal residence for the whole time you owned it.
Investment and Registered Retirement Savings Plan (RRSP) Transfers
Assets transferred from one spouse’s RRSP to another as part of divorce can be tax-free, but withdrawals will be taxed when the recipient accesses the funds.
Divorce affects one’s eligibility for different tax credits and government benefits.
Canada Child Benefit (CCB)
The parent with primary custody can claim CCB, but in shared custody arrangements the payments can be split between the two parents.
GST/HST Credit
Qualification for the GST/HST credit can change after divorce based on adjusted family income.
Eligible Dependent Credit
A single parent who supports a dependent child can be eligible to claim this credit, which reduces taxable income.
Understanding the tax implications of divorce can help you avoid costly mistakes. Looking for professional tax advice and keeping the CRA informed of your changing circumstances can ensure financial stability post-divorce.
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.