Tax Considerations After a Separation or Divorce

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Written on behalf of Shariff & Associates

When going through a separation or divorce, many individuals find themselves asking questions related to finances. Issues such as child and spousal support and property division frequently come to mind. However, separating from a spouse may also have subsequent tax consequences to consider. As tax season for Canadians approaches, it is important to understand how a split from a spouse might impact your annual tax filings. 

This blog post will provide an overview on several common tax issues relating to marital status, however, this information should not be construed as tax advice. When preparing your taxes after a separation or divorce, it is important to seek advice from your family lawyer and tax accountant to identify the best options for you and your family.

Your Duty to Inform the Canada Revenue Agency of a Change in Status

Did you know that you are obligated to inform the Canada Revenue Agency (CRA) of any changes to your marital status by the end of the month following the change? For example, if your divorce was finalized in January 2023, you must update your status with the CRA by the end of February 2023. 

A notice of change in status should be made for any of the following events:

  • Marriage,
  • Commencement of a common-law relationship,
  • Separation of at least 90 days,
  • Divorced, or
  • Your spouse or partner dies.

Clarification on Common-Law Relationships and Separations

For tax purposes, the CRA considers you to be in a common-law relationship when you are living in a conjugal relationship with someone to whom you are not married, and at least one of the following applies:

  • You have been living in a conjugal relationship with this person for at least 12 months,
  • You share a biological or adopted child with this person, or
  • This person has custody and control of your child (or did before the child’s 19th birthday) and your child is wholly dependent on this person for support.

For the purposes of updating your marital status with the CRA, you are considered separated after you have been voluntarily living separately from your spouse for a period of at least 90 days. 

It is important to note that while spouses can be considered separated in a family law context even while residing in the same home, this does not apply for tax purposes. Certain exceptions to this general rule may apply if the parties maintain separate living quarters in the same household and keep finances and other responsibilities separate. Note that involuntary separations due to reasons including health, work, or incarceration do not impact your marital status with the CRA. 

Divorce and Separation Can Impact Federal Benefits

Maintaining an updated marital status with the CRA is also important as it may impact your entitlement to, and the distribution of, certain tax credits or benefits, as outlined below.

Canada Child Benefit

The Canada Child Benefit provides a benefit to parents each year until their child turns 18 years old. Ordinarily, when the parents are married or in a common-law relationship, the parent who primarily cares for the child will claim the benefit. However, if the parents are no longer together and they share parenting time, the benefit can be divided between them. 

The CRA will calculate the amount each parent would be entitled to based on their adjusted family income as determined post-separation or divorce. Based on the calculations, each parent will receive 50% of that amount as their adjusted benefit. 

GST/HST Tax Credit

The GST/HST tax credit is an income-based tax credit. Individuals who did not qualify for the GST/HST credit during their marriage or common-law relationship may qualify after a separation or divorce. 

Taxes and Asset Transfers Between Spouses

In a divorce, each spouse is normally entitled to an equal share of the family assets and property which has been accumulated during the marriage. In many cases, one spouse will be required to make an equalization payment to the other in order to facilitate an equal division. 

Funds transferred between spouses are generally not taxable, given that the parties would have likely already paid tax on the money. In contrast, transferring other items, such as recreational properties, automobiles, or shares in a business, may attract tax consequences. There are, however, methods of transfer which can be more beneficial than others. It is recommended that you consult with your family lawyer and tax accountant before completing any transfers to ensure the process is completed strategically and in accordance with the law. 

Tax Considerations for Child Support and Spousal Support 

Child and spousal support payments have unique tax considerations to be mindful of. Child support payments are not considered to be taxable income for the recipient parent. Further, child support payments are not deducted from the payor’s income. 

Conversely, spousal support payments are considered taxable income for the recipient parent. The payor parent may deduct regular spousal support payments from their total income. However, this general rule only applies to regular spousal support payments which are made pursuant to a separation agreement or court order. Voluntary spousal support payments are typically not tax-deductible for the payor. 

Tax consequences on lump-sum payments will depend on whether they are made as payment of support arrears, or according to a separation agreement. Due to the variable nature of tax consequences, it is best to discuss these questions with your family lawyer, financial planner, or tax accountant to determine which rules apply to you. 

Contact the Family Law Lawyers at Shariff & Associates in Whitchurch-Stouffville for Proactive Advice on Tax Consequences After a Divorce or Separation

The experienced family law lawyers at Shariff & Associates regularly advise clients on several complex family law matters, including child support, spousal support, and common-law separation. When the family property is divided pursuant to a divorce or separation, individuals may have questions and concerns relating to their finances and income taxes. For these reasons, it is recommended that you seek professional advice from your tax accountant and family lawyer to understand the impact your new circumstances will have on your income tax filing and entitlement to various benefits. 

Located in Stouffville, Shariff & Associates proudly represents clients within Markham and the Greater Toronto Area. To arrange a confidential consultation with a family lawyer regarding your support claims and tax questions, contact us online or call us at 905-591-4545.