Spring is in the air, which means longer days, warmer weather…. tax time!
Many of our family law clients have questions for us about how their separation or divorce will affect their income taxes. While our first answer must always be: “talk to your accountant,” who is best positioned to advise each individual based on the particular circumstances of their situation, we are pleased to offer a short primer on a few income tax considerations, as well as links to some useful forms.
For a more detailed summary, we suggest a review of the Canadian Bar Association’s Tax Matters Toolkit: https://www.cba.org/CBAMediaLibrary/cba_na/PDFs/Sections/taxMattersToolkitClients_Eng.pdf
1. Change in Marital Status form
Where you have experienced a change in marital status in a given tax year, you can file the Marital Status Change form with the Canada Revenue Agency (“CRA”): https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/rc65/rc65-17e.pdf to advise of the change.
Making the CRA aware of a change in marital status may affect, to the benefit of the lower-income spouse, the receipt of child tax benefits and GST credits.
The Marital Status Change form for income tax is to be filed 90 days after separation or not later than the month following the date your marital status changed by court order.
2. Canada Child Benefits Application
The Canada Child Benefits Application form is used to apply for child benefits programs administered by the Federal Government, including the Canada child benefit.
A copy of the form can be found here: https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/rc66/rc66-17e.pdf
Parents should complete this form to advise the CRA of a change in parenting arrangements that could affect the amount of child benefits that are paid.
Where parenting is shared, which means that a child is with one parent at least 40 per cent of the time, the Canada child benefit will generally be shared between the parents’ households. However, the Canada child benefit is income-dependent, meaning the benefit will be larger for lower-income households.
3. Tax Consequences of Support Payments
Spousal support payments, made pursuant to a written agreement or court order, are taxable in the hands of the recipient, and income tax-deductible for the payor.
Child support, on the other hand, is “tax neutral,” in that child support payments are not taxable in the hands of the recipient, or tax-deductible by the payor.
Where spousal support is paid pursuant to a written agreement or court order, the spouses should file the Registration of Family Support Payments form, found here: https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1158/t1158-17e.pdf
This form advises the CRA that spousal support is being paid pursuant to a written agreement or court order.
Spousal support paid in a lump sum is generally not taxable; however, some lump-sum payments for spousal support that is overdue (also known as arrears of spousal support) may have income tax consequences if that payment is deemed a “Qualifying Retroactive Lump-Sum Payment.”
The form for a Qualifying Retroactive Lump-Sum Payment can be found here: https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1198/t1198-17e.pdf
We suggest you speak with an accountant about the retroactive payment would be considered a Qualifying Retroactive Lump-Sum Payment.
Finally, the payor of spousal support can seek to have their income taxes reduced at source to account for ongoing spousal support payments, or a Qualifying Retroactive Lump-Sum Payment.
The payor of support must complete the Request to Reduce Tax Deductions at Source for Year(s) form, found here: https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1213/t1213-17e.pdf
4. Tax Consequences of Division of Registered Investments
On separation, spouses are able to transfer registered investments between themselves without incurring tax consequences.
Spouses transferring registered investments on separation must complete the Form T2220, found here: https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2220/t2220-17e.pdf
5. Are Legal Fees Tax Deductible?
The portion of legal fees incurred by the recipient of child and/or spousal support, paid by the recipient to obtain or inforce support payments, are tax deductible. A letter setting out details of the legal fees incurred for these purposes should be requested from the family lawyer.