Divorce & Separation: Tax Implications

Support Payments: Tax Treatment

Spousal Support

Under a written agreement or court order:

• Payer: Deducts payments from income (Line 22000)
• Recipient: Reports payments as income (Line 12800)
• Must be periodic payments (not lump sum)
• Living separately when payments made

Child Support

For agreements made after May 1, 1997:

• Payer: NOT deductible
• Recipient: NOT taxable
• This is the "tax-free" treatment

Requirements for Deductibility

• Written agreement or court order
• Living apart due to relationship breakdown
• Periodic payments (monthly, etc.)
• Paid to spouse/ex-spouse or to third party for their benefit

Property Division

General Rule: Tax-Free Rollover

Transfers of property between spouses as part of separation are generally tax-free:

• No immediate capital gains on transfer
• Receiving spouse takes over cost base
• Tax is deferred until property is sold

RRSPs and RRIFs

Can be transferred tax-free between spouses if:

• Transfer is pursuant to court order or written separation agreement
• Done through direct transfer (T2220 form)
• Receiving spouse's contribution room is not affected

Principal Residence

• Can be transferred to spouse tax-free
• Future PRE claim depends on who lived there
• Only one PRE per family unit per year

Changes to Filing Status

Year of Separation

• Can file as "separated" if apart for 90+ days by December 31
• Regain single status for credits
• Benefits recalculated based on individual income

What Changes

• Lose spousal tax credits
• May gain eligible dependant credit (single parent)
• GST/HST credit recalculated individually
• CCB recalculated based on custody and income

Children: Tax Credits and Benefits

Eligible Dependant Amount

After separation, custodial parent may claim:

• Equivalent to spousal amount for one child
• Cannot both claim for same child
• Maximum ~$15,705 (2024)
• Reduced by child's net income

Canada Child Benefit

• Goes to parent who primarily cares for child
• In shared custody: split 50/50 between parents
• Each parent's portion based on their family income

Child Care Expenses

• Each parent claims expenses they paid
• Subject to income-based limits
• Annual limits per child still apply

Shared Custody Arrangements

When parents share custody relatively equally:

• CCB split between parents
• Only one can claim eligible dependant (must agree or split different children)
• Each claims their own childcare expenses
• GST/HST credit: One parent gets child amount OR both get 50%

Pension Division

CPP Credits

• CPP contributions can be split equally for years of cohabitation
• Apply to Service Canada
• Affects future CPP benefits

Employer Pensions

• May be divided under family law
• Transfer to recipient's RRSP or pension plan
• Provincial pension splitting rules apply

Legal Fees

Deductible

• Fees to establish right to spousal support
• Fees to collect late support payments
• Fees to increase support amounts

Not Deductible

• Fees to obtain divorce
• Fees for property settlement
• Fees to defend against support claims
• Fees to reduce support payments

Updating Records

Notify these agencies of your separation:

• CRA: Update marital status within 30 days
• Service Canada: For CPP/EI purposes
• Provincial benefits: If applicable
• Employer: Update tax forms and benefits

Common Mistakes

• Not updating status: Benefits overpayment must be repaid
• Claiming wrong children: Both parents claiming eligible dependant
• Informal arrangements: Support must be in writing for tax treatment
• Lump sum payments: Generally not deductible/taxable
• Direct payments to children: May not qualify as support

Year of Separation Planning

Timing Considerations

• Separation date affects which credits you can claim
• May file as separated even if divorce not final
• Consider timing of property transfers

Coordinating Returns

• Agree on who claims which children
• Ensure both report support payments consistently
• Coordinate medical expense claims

Post-Divorce Considerations

Beneficiary Updates

Review and update beneficiaries on:

• RRSPs and TFSAs
• Life insurance policies
• Pension plans
• Wills and estates

Name Changes

• Update SIN records if name changes
• Ensure tax returns use consistent name

Getting Professional Help

Consider a tax professional or divorce financial analyst if:

• Significant assets to divide
• Complex support arrangements
• Business ownership involved
• Foreign assets or income