In light of the global Covid-19 pandemic, the federal government has extended the deadline for filing personal income tax returns to June 1, giving newly separated people a bit more time to think about how recent changes in their marital status will impact their tax situations.
There are several issues couples should consider when dividing mutual assets and navigating tax credits to ensure they're getting the benefits and deductions they're entitled to receive.
First, it's important to point out that for income tax purposes, married spouses and common-law partners are treated the same in the eyes of the Canada Revenue Agency (CRA). The agency's definition of a common-law partner is someone with whom you are living in a conjugal relationship, if that person has been living with you for at least 12 continuous months; is the parent of your child by birth or adoption; or has custody and control of your child, who is wholly dependent on your common-law spouse for support.
I have put together a list of responses to the most frequently asked questions I get in my practice.
How are child and spousal support affected?
Tax deductions don't apply to child support payments, so there are no implications for either the person paying or receiving them. But spousal support is another matter: If you're a support payor and have a formal separation agreement or court order in place, you can deduct spousal support from your taxes. Likewise, if you're a recipient, you have to claim it as income on your tax return.
Sometimes couples get into trouble when they're living apart, but don't yet have a formal separation agreement in place. In that scenario, if one partner is making spousal support payments, they won't be able to count those payments as deductions on the tax returns. That requires a formal agreement.
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Advisor's Edge reports that couples must notify the CRA of their status change (using Form RC65 Marital Status Change) once separated more than 90 consecutive days due to a breakdown in the relationship. This point proves the timing of the separation and triggers the agency to process changes to credits and payments.
Who claims the eligible dependent credit?
When dependent children are involved, parents will need to determine which one claims the eligible dependent credit, which can save about $2500 a year in taxes. A primary parent who receives child support may claim the credit for one child. But a parent paying child support to the primary parent can't claim the credit for a child they pay support for.
There are some creative ways to structure this in a separation agreement, depending on your family's particular situation and custody arrangement. For example, if you have two children and share custody with your former spouse, each parent can claim the tax credit for one. For couples with one child, they can either alternate years of claiming the credit or one parent could claim the credit for the first six months of the year while the other claims it for the second half. The only caveat is that both parents can't claim it for the same time period for the same child.
The best way to organize how the tax credits will be claimed is to outline the arrangement in your separation agreement. Otherwise, there may be confusion and an unwelcome interaction with the CRA.
I recently had a case where my client's tax credit situation was a mess. We had to recalculate the credits going back six years because of confusion on the part of her former spouse.
How does the Canada Child Benefit work?
The Canada Child Benefit (CCB) is a tax-free monthly payment made to eligible families to help with the cost of raising children. In shared custody arrangements, each parent is entitled to receive 50 per cent of the benefit, which is calculated on their net family income.
What are the tax consequences for shared assets?
Often when couples split, they have mutual assets such as rental properties or investments that need to be sold off and divided for equalization purposes. It's important to ensure that you factor the tax consequences into whatever settlement you agree to sign.
Can I write off legal fees in my taxes?
In general, legal fees are not tax-deductible, with one notable exception: if you are paying a lawyer to receive child support, you can deduct these fees from your overall income on your tax return.
When should I call in the accountant?
Some family law matters are more complex than others. In those cases, I often suggest that clients consult with an accountant or tax advisor to figure out the best way to structure things to their maximum benefit.