When you are going through a separation or divorce, income tax issues will likely not be top of mind. However, good tax planning, before and during a separation can generate significant tax savings and help preserve your assets.
Support payments
While support payments can be determined by agreement, most provinces have adopted federal guidelines. Spousal support payments are treated differently from child support payments from an income tax point of view. Child support payments are neither taxable for the recipient nor deductible by the payor. However, spousal support payments are generally taxable if they meet certain conditions. The amount of spousal support must be determined by a competent tribunal or by written agreement, signed and dated by both parties and must be paid on a periodic basis. Lump-sum payments are generally not considered support payments as they are not paid periodically. Certain payments to a third party may be deductible by the payor, if the payments are made pursuant to an order or written agreement.
Canada child benefit
The tax-free monthly benefit for families raising children under age 18 is typically paid to the primary caregiver. In a shared parenting arrangement, each parent is entitled to half the amount they would qualify for if they were not co-parenting.
Eligible dependent credit
This credit is available where the parent supports an eligible dependent and does not live with a spouse. This credit generates as much as $2,000-$3,000 in tax savings each year, depending on the province. The primary parent who receives child support may claim the credit for one child. A parent paying child support to a primary parent cannot claim the credit for any child.
Legal fees
Any legal fees paid to establish, adjust, or enforce payment of support payments are deductible. On the other hand, legal fees related to establishing parental rights and obtaining a divorce are not.
Dividing up matrimonial assets
Matrimonial assets can be transferred between spouses on a tax-deferred basis so that no capital gain is triggered. Common examples are the division of investments in a holding company or rental properties. Certain assets such as a principal residence, cash or other personal assets with no unrealized gains can be transferred at fair market value without any tax consequences.
Direct transfers between RRSPs and RRIFs can also be made without triggering any tax.
