Tax Issues on Divorce

When a marriage or common law relationship breaks down, there are several issues to be considered in the process, some of which include financial and tax issues. The following article will examine some key Canadian tax rules that couples should take into consideration during a divorce or separation.

First, it is important to define who is considered to be married for tax purposes. Of course, individuals who are legally married fall under this category. In addition, individuals who have been living together in a conjugal relationship for at least 12 consecutive months or have a child together are considered ‘common law’ unions. Common law relationships are treated in the same manner as married couples for tax purposes.

In regards to defining dates for tax purposes, a legal marriage ends when the couple obtains a legal divorce. For a common-law relationship, the individuals are no longer a couple when they live separate from each other for at least 90 days due to a breakdown in the relationship. The common law relationship is thus deemed to have ended on the 1st day they begin to live separate. The CRA should be notified of changes in marital status; this allows the CRA to adjust the couple’s tax liability and benefits received.

The end of a marriage triggers two events: division of family assets and the payment of support payments.

Capital property can be transferred between spouses at its adjusted cost base meaning that taxes will not arise on the transfer until the assets are sold. RRSP funds can be transferred between spouses on a tax deferred basis; however, the transfer must be made pursuant to a court order or a written separation agreement. The recipient of the RSSP funds will be taxed later when the money is drawn. In regards to TFSA’s, assets can be transferred from one spouse’s TFSA to the other spouse’s TFSA. It should be noted that the annual contribution room of the spouse receiving the TFSA funds would not be affected. On the other hand the transferor spouse would not have his/her TFSA contribution room reinstated for the amount transferred. Canadian Pension Plan credits earned by both spouses during the marriage can be combined and split at the end of the marriage.

Generally, spousal support payments are tax deductible for the spouse paying it out and taxable for the spouse receiving it. This is only if the payments made are pursuant to a court order or agreement and if the payments are made periodically. In regards to child support, payments are not generally tax deductible for the payer and are not taxable to the recipient.

Legal fees are deductible in the year they are incurred and cannot be carried forward for deduction in another year. If the recipient of support payments enlists legal assistance to collect late, establish or increase payments then those legal fees are deductible. In this same instance, legal fees are not deductible for the payer.

The points mentioned above are all important issues that need to be considered from a financial perspective during the breakdown of a marriage. Filing for a divorce can be an extremely stressful and tiring ordeal; handling marriage related tax issues is certainly the last thing that would be on anyone’s mind. At GTA Wealth Management Inc, we can help. We have a team of professional tax accountants and financial advisors who will provide you with the assistance you need to manage tax issues that arise upon the breakdown of a marriage. Contact or call GTA Wealth Management toll free 1 855 GTA WLTH (855 482 9584) to accelerate your ride to financial independence. A professional wealth management financial advisor is ready to serve your wealth management, tax return and planning needs. GTA Wealth Management Inc. has three convenient locations in Mississauga, Toronto and Markham to serve you.

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