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Tax planning on separation and divorce – in a nutshell

When you are going through a separation or divorce, income tax issues will likely not be top of mind. Good tax planning, however, before and during the 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 income tax point of you. Child support payments are neither taxable to the recipient nor deductible to the payor. Spousal support payments are generally taxable if they meet certain conditions. The spousal support must be received pursuant to an order of a competent tribunal or by written agreement between the parties which is signed and dated by both parties. It must be payable on a periodic basis. Lump-sum payments are generally not considered support payments as they are not paid on a periodic basis. Certain payments to a third party may be deductible to 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 will be entitled to one- half the amount they would otherwise qualify for if they were not in a shared parenting arrangement.

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 saving 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 they paid support for.

Legal fees

Any legal fees paid to establish, seek an adjustment to, 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 deductible.

Dividing up matrimonial assets

Any matrimonial assets can be transferred between the spouses on a tax-deferred basis so that no capital gain is triggered on the transfer. 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 be made without triggering any tax.

 

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