5 Ways Divorce Impacts Your Taxes in Canada
With tax season barely in our rearview mirrors, but still fresh in our minds, now is probably a good time to talk about the effects of divorce on your taxes. As you might remember, getting married or having children had an impact on how you filed your taxes and divorce is similar, but a little more complicated. If you have divorced in 2014, you will see some of this impact as you file next year’s return, but even if you have already been divorced for over a year, many of the biggest tax implications are on-going.
To give you an idea of the items you should be making note of, we’ve written a quick reference list for you to take a look at. As collaborative professionals, we know that divorce deeply impacts more than initial finances or family decisions, which is why we often recommend involving a financial professional when someone is pursuing a collaborative divorce.
5 Ways Divorce Impacts Taxes
Claiming children as dependents – As a rule, only one parent can claim the “amount for an eligible dependent” or AED. When deciding terms of a separation, who is going to claim the AED is usually established, but if there is a disagreement and both try to claim the AED, neither will receive the credit. Interestingly, if you have two children and share custody and access, each parent is able to claim one child.
How the CRA defines marital status – Depending on when you and your spouse separate, you might find yourself confused about the definition of your marital status, come tax time. Generally speaking, the CRA considers a couple that has been separated for more than 90 days to be separated for the purposes of Child and Family Benefits. The day you began living apart is the date they use to start the 90-day clock.
Tax Credits and Benefits – Because your tax credits were determined with your marital status when you filed your last return, you need to notify the CRA when your marital status changes. Once you do this, they will recalculate your benefits or credits. You can also apply to receive a credit you didn’t apply for when you were married because of your change in status. You may also need to file a new WITB application.
Spousal support – With a properly signed separation agreement, you are able to deduct your spousal support payments from your income to help reduce your taxable income. It’s important to note that lump sum payments or voluntary payments not made pursuant to a separation agreement or court order aren’t tax deductible. As an added note, legal fees paid by the recipient of child or spousal support relating to obtaining the support may be deductible. Consider speaking to your financial advisor about this.
Transferring assets – Important steps need to be taken in order to make sure you’re not liable to pay capital gains taxes if you transfer your family home or cottage to one person. This usually involves preserving the home’s principal residence status or choosing which property to designate as your principal residence. Also, other property, like shares and rental properties, can be transferred tax-free if proper planning is done.
BONUS TAX INFO: Did you know that if two people are not married, but have a child together, they are considered common-law as soon as they start living together? This is good information to keep in mind if you’re filing taxes after separation from a common-law spouse and is definitely something to speak to your financial professional about.
As with any legal or financial complication, there are people who are trained to handle the solutions. One of the benefits of choosing a legal method like Collaborative Practice is that you can decide to involve both legal professionals and financial professionals (along with family professionals), allowing you to address your separation from every angle and receive the support you need. If you would like to speak with a collaborative professional about how divorce will affect your tax situation, please search for a collaborative financial professional close to you.
