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Tax Consequences of Separation or Divorce

How does a marital status change affect my benefits?

The CRA will recalculate your benefits based on the number of children you have and their ages, your province or territory of residence, and your revised family net income based on your marital status change. Your benefits will be adjusted the month following the month in which your marital status changed.

CCTB: If you or your new spouse or common-law partner have children who are residing with you, the CRA will move all the children to the female parent’s account. If you are married or living common-law with a person of the same sex one of you will receive the CCTB for all the children. To continue receiving the CCTB, you have to file a tax return every year, even if you have not received income in the year. If you have a spouse or common-law partner, they also have to file a tax return each year.

GST/HST credit: If you did not apply for the GST/HST credit on your tax return and your status is now separated, widowed, or divorced, you can apply now by writing a letter to your tax centre or by calling the CRA at 1-800-959-1953. Once the CRA review your request, the CRA will send you a GST/HST credit notice advising you of the amount of your GST/HST credit.

WITB Advance Payments: If your marital status has changed, you will need to file a new WITB Advance Payment application. If you do not file a new WITB Advance Payment application, your WITB advance payments will be stopped until a new application is received. The application deadline date is August 31st.

When should I advise the Canada Revenue Agency (CRA) of my marital status change?

If your marital status changes you must notify the CRA by the end of the month following the month in which your status changed. Do not notify the CRA until you have been separated for more than 90 consecutive days.

How do I advise the CRA of my marital status change?

If your marital status has changed, you must inform the CRA of your new status and the date of the change. You can do this by using “Change my marital status” on My Account or by calling 1-800-387-1193.

You may also complete and send form RC65, Marital Status Change or provide the information by sending a letter to the tax center that serves your area. Be sure your letter includes the date (day, month and year) of the marital status change, your name and social insurance number, along with your spouse or common-law partner’s name and social insurance number (if applicable).

Support for spouses: Support payments made to spouses or common-law partners are taxable to recipients and deductible by payers. However, in the year of separation or divorce, a payer may claim either the deduction for support or the spousal amount: not both. The only way to avoid this tax status is to receive a lump sum, in which case payments are neither deductible nor taxable.

Spouses receiving the taxable amount may be unprepared to pay tax when a large balance due is due April 30. They may need to pay quarterly installment payments on the income the tax year after its first paid and reported. This should be discussed before separation or divorce papers are finalized to ensure the net tax result intended is actually paid and received.

Support for children: For all agreements or court orders after May 1997, child support payments are not taxable to recipients or deductible by payers. For tax purposes, any support stipulated in agreements or court orders is deemed to be child support if not identified as spousal support.

Complications arise if support payments are in arrears. Arrears payments are deemed child support payments until child support is current. Subsequent payments are considered spousal support payments, taxable to recipients and deductible to payers.

Separating assets: Attribution rules don’t apply to assets transferred as a result of separation, providing the couple continues to live apart. The new owner of the property after relationship breakdown is responsible for all tax on earnings and capital appreciation (depreciation) of the property. The cost base at which assets are transferred is important because it determines how future gains and losses from taxable investments will be calculated.

Spousal RRSPs: Spousal RRSP contributions will no longer be allowed. While the couple is together, withdrawals from spousal or common-law partner RRSPs made by the annuitant are reportable by contributing spouses if RRSP contributions have been made in the current or previous two years. This rule is waived for separated/divorced couples.

RRSP accumulations: Funds in RRSPs may be rolled over tax-free to ex-spouses if the parties are living apart and payments follow a written separation agreement, court order, decree or judgment. Transfers must be made directly between the RRSPs of the spouses: one spouse can’t be disqualified because of age (over age 71). The same rules for tax-free transfer of funds apply to RRIF accumulations.

TFSA accumulations: These can be split tax-free. Funds from one party’s TFSA may be transferred tax-free to the other’s TFSA. This does not affect contribution room of either party.

 

Principal residence: After separation, CRA recognizes two family units, so each can own one tax-exempt principal residence.

Other property: Transfer of depreciable property used in business or a rental property takes place at the Undepreciated Capital Cost of the property. So no recapture, terminal loss or capital gain takes place on the transfer. For other capital property, transfers takes place at the Adjusted Cost Base of the assets, enabling a tax-free rollover.

Disclaimer:

This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.

References:

http://www.moneysense.ca/columns/the-high-tax-cost-of-divorce-separation

http://www.cra-arc.gc.ca/bnfts/mrtl/menu-eng.html

http://commonsensedivorce.ca/divorce-and-money/divorce-and-taxes

101 Tax Secrets for Canadians by Tim Cestnick

 

Mansoor Suhail (Mani)

Accountant

MS TAX – BSBA – EA – ICIA – RA

Tax for Canada and U.S.A

Web: www.theaccountingandtax.com and www.taxservicesguru.com

Blog: http://taxservicesguru.blogspot.ca

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