What to Know About Divorce and Taxes - Zukerman Law

What to Know About Divorce and Taxes

Going through a divorce can be emotionally and financially challenging, and one aspect that often complicates matters is understanding the tax implications involved. Navigating the intersection of divorce and taxes requires careful consideration and professional guidance to ensure that both parties can move forward with clarity and confidence.

In this blog post, we will explore key insights into how divorce can impact your tax situation and what you need to know to make informed decisions. Whether you’re in the midst of a divorce or simply preparing for the future, understanding these tax implications is crucial.

Before we delve into the details, it’s important to acknowledge that every divorce case is unique, and seeking personalized legal advice is highly recommended. If you’re in need of an experienced counsel, the Zukerman Law Group specializes in family law and can provide the guidance you need during this challenging time.

Tell the CRA You Are Separated

Tell the CRA You Are Separated

In Canada, the breakdown of a marriage is the sole basis for divorce. To file for divorce, you have to provide proof of one of three things:

  • Separation for one year or more
  • Adultery
  • Mental or physical cruelty

Canadians typically use a year-long separation as proof of a broken marriage. But the authorities won’t just believe what you say. 

You have to show the CRA that you have been living separately for at least ninety days. If you continue to pay your bills together during that time, the CRA may not accept your separation claim.

The number of children in your care, your updated family income, and the province or territory in which you reside might all affect how much taxes you owe or the benefit amounts you can claim.

Therefore, if you change your marital status, you should tell the CRA so that your GST/HST credit and Canada Pension Plan (CPP) credits are paid to you in the proper amount.

Tax Implications of Separation and Divorce

Tax Implications of Separation and Divorce

Separation or divorce can have tax implications. The Canadian Revenue Agency (CRA) considers you separated if you’ve been living apart for over 90 days due to a relationship breakdown. If you’re separated, you’ll be taxed as a single person, while if you’re still married or reconciled, you’ll be taxed as a married couple.

The Impact of Alimony and Child Support on Taxes

The Impact of Alimony and Child Support on Taxes

Managing child support and alimony can be difficult, particularly when there are tax implications. Alimony, also known as spousal support, is often tax deductible for the payer and considered taxable income for the recipient. It requires careful consideration and planning during the divorce process since it impacts both the beneficiary’s and the payment’s future tax returns.

On the other hand, child support is not considered taxable income by the recipient and is not deductible for tax purposes. It’s crucial to comprehend the tax implications of both alimony and child support in order to make informed decisions and avoid any unpleasant surprises at tax time.

Managing the tax implications of these payments may be done deliberately and strategically with some foresight and planning.

Property Division and Taxes

Property Division and Taxes

It is crucial to take the tax implications for each asset into account when dividing them during a divorce. For example, if you have investments, selling them might require you to pay capital gains tax. This tax is determined by the difference between the asset’s buying and selling prices. 

Furthermore, you can be subject to capital gains tax if you sell your home as a homeowner. If the house was your main residence, however, you may be eligible for the principal residence exemption, which could lower or even eliminate your capital gains tax obligations.

Registered Retirement Savings Plans (RRSP) and Taxes

Registered Retirement Savings Plans (RRSP) and Taxes

In divorce cases, RRSPs are a factor to consider. If a spouse withdraws funds during the marriage, it will be taxed as income. However, if you transfer RRSP funds to your spouse as part of a divorce settlement, the transfer will not be taxable.

Capital Assets and Taxes

Capital Assets and Taxes

Capital assets, such as non-registered investments, a cottage, or a rental property, can also be transferred on a tax-deferred basis between spouses.

When giving away ownership of a capital asset to your ex-partner, there are no tax implications until the asset is sold, which triggers a capital gains tax for the owner. To optimize the situation and avoid giving away money to the government, talk to your ex-partner about meeting with a professional before selling off life savings. 

It is crucial to make decisions without emotional stress and unravel the life together at a pace that both feel good about. Hiring a professional provides unbiased wisdom and support.

Tips for Managing Taxes During Divorce

Tips for Managing Taxes During Divorce

Going through a divorce can be overwhelming, and keeping track of tax implications can easily fall by the wayside. Here are some key tips to help you manage the tax side of your divorce:

1. Gather and Organize Documents

Having all your financial documents readily available will save you time and frustration later. This includes the past three years of joint tax returns, W-2s, 1099s, bank statements, investment account statements, mortgage statements, and any documentation related to debts (car loans, student loans, etc.).

Having this information readily available will streamline the tax filing process for both you and your tax professional.

2. Communicate with Your Ex-Spouse

Maintain clear and open communication with your ex-spouse regarding financial matters throughout the divorce process. This includes sharing all relevant financial documents and being transparent about income, assets, and debts.

If communication is difficult, consider involving a mediator to facilitate discussions. Open and honest communication will not only make the divorce process smoother but can also help avoid tax-related surprises down the road.

3. Consult a Tax Professional

The complexities of tax law, especially in the context of divorce, can be daunting. Consulting a qualified tax professional is crucial to ensure you understand the specific tax implications of your divorce settlement.

Note: Contact Zukerman Law Group today to schedule a consultation. Our expertise in both tax and family law can give you peace of mind knowing your financial future is protected.

Conclusion

Divorce is a life-altering event, and navigating its financial aspects can feel overwhelming. By understanding the key tax implications and following our tips, you can approach this process with more clarity and confidence. Remember, you don’t have to go through this alone.

Zukerman Law Group’s team of experienced divorce attorneys and tax professionals can provide comprehensive guidance throughout your divorce. 

FAQs

  • 1- Does your spouse’s income affect your tax return in Canada?1

    While Canadians file separate tax returns, your spouse’s income can impact yours. Their income affects benefits you qualify for and can be taxable if received as spousal support, or deductible if you pay it.

  • 2- Do you need to notify the CRA of the separation?1

    The CRA should be informed of any changes in your marital status to ensure you receive the appropriate amount of benefit and credit payments.

  • 3- Who claims to be dependent on taxes in divorce?1

    In a divorce, neither spouse claims to be dependent on their taxes.

    Instead, the parent who primarily cares for the child and meets the eligibility requirements can claim the “child tax credit” or the “amount for an eligible dependent” on their tax return. This credit helps offset the cost of raising a child.

There were no results that matched your search.
author

Stuart Zukerman

Stuart Zukerman, a graduate of the University of British Columbia, has over 32 years of experience in litigation with a focus on Family Law, Personal Injury, Wrongful Dismissal claims, and Collaborative Divorce & Mediation. He has extensive trial experience in divorce, child custody, spousal support, asset division, and ICBC injury claims. As an accredited Family Law Mediator, he helps resolve disputes without court intervention. Stuart has also authored papers on family law and lectured at CLE courses.