Canada Divorce Tax Implications And Separation: What to Know

Dividing up assets and property can be complex, made even more so by tax implications. In Canada, there are a few things to keep in mind when it comes to divorce and separation regarding taxes.

Split Your Family Assets

This means that you should consider the taxes you will have to pay on the assets you receive as part of the divorce settlement. You want to ensure that you end up with the largest share of the assets after taxes are taken into account. You should keep the house in the divorce and let your ex-spouse take the non-registered investments and RRSPs.

Do Not Cash in RRSPs

When splitting your family assets, it is generally not a good idea to cash in your RRSPs. There is a special rule in the Income Tax Act that allows one spouse to transfer their RRSP to the other spouse upon separation or divorce. This can be helpful if you have to make an equalization payment to your spouse. If you don’t use this special tax rule, you might have to cash in your RRSPs to make an equalization payment to your spouse.

Update the CRA with Your New Marital Status

Make sure you notify the Canada Revenue Agency (CRA) of your new marital status. If you don’t, the CRA may apply penalties and interest to any outstanding tax debt. If you have children and you get divorced or separated, you need to tell the CRA about your new marital status. The amount of money you get from the Canada Child Benefit (CCB) program is based on your family’s income. This includes your combined income and your former spouse or common-law partner. If you are separated or divorced, the only income that will be considered for the Canada Child Benefit is yours. Your spouse’s income will no longer be looked at. Therefore, if you change your marital status to divorced or separated, you will probably receive more money from the Canada Child Benefit.

Split Property Ownership

If you and your spouse are splitting property ownership, you will each receive an equal share of the property. This means that, if you are the primary home-owner, you will receive most of the property’s value. If you are the secondary homeowner, you will receive a smaller share of the property’s value.

Some Legal Fees are Tax Deductible

If you are paying for a divorce lawyer, you may be able to deduct some of the legal fees on your taxes. This deduction only applies if you are the one who pays the lawyer, not if you are the one who receives the payout from the lawyer. To be eligible for this deduction, the lawyer’s services must be for the purpose of dividing property in a divorce. The lawyer’s fees must also be paid in the tax year in which the divorce is finalized.

The Bottomline

There are a number of tax implications to be aware of when going through a divorce or separation in Canada. These can include changes to your filing status, deductions, and credits. It’s important to speak with a qualified tax professional to ensure you are taking advantage of all the tax benefits available to you and to ensure you are complying with all the rules. Do you need help with divorce mediation? We can help here at Alberta Divorce Finances. Get in touch with us.