How Divorce Affects Taxes in Toronto | Lawyer Insights

Changing Your Filing Status after Divorce

When going through a divorce in Ontario, there are significant tax implications to consider, particularly how your filing status changes with the Canada Revenue Agency (CRA). Lawyers in Ontario emphasize that understanding these changes is key to ensuring compliance and avoiding costly mistakes.

Overview of Different Tax Filing Statuses in Canada

Unlike in the United States, Canada does not have joint filing for couples. Individuals file their taxes independently, but your marital status impacts key credits, deductions, and benefits. The CRA recognizes the following statuses:

1. Married: You are legally married and living together.
2. Common-Law Partner: You have lived together in a conjugal relationship for at least 12 consecutive months or share a child together.
3. Separated: You are no longer living together due to a breakdown of your relationship, for a minimum of 90 consecutive days.
4. Single: You are not married or in a common-law partnership.
5. Divorced: You are legally divorced.

 

How Your Status Changes After Divorce

Once you are officially divorced or separated in Ontario, you must update your status with the CRA. Here’s how this change affects your taxes:

• Change in Benefit Eligibility: Programs like the Canada Child Benefit (CCB) and the GST/HST Credit depend on your marital status and income. Filing as “separated” or “divorced” could mean receiving higher benefits if your household income decreases.
• Spousal Support Taxation: If you pay or receive spousal support under a written agreement or court order, it must be reported on your taxes. Payors can claim a tax deduction, while recipients must report it as taxable income.
• Child Support Payments: Unlike spousal support, child support payments are not deductible for the payor or taxable for the recipient.
• RRSP Contributions: After divorce, if assets are transferred under a separation agreement, you may have opportunities to transfer Registered Retirement Savings Plan (RRSP) funds tax-free.

 

Deadlines and Considerations for Updating Your Filing Status

It’s essential to update your status with the CRA promptly. Missing deadlines or failing to report your marital status can affect your eligibility for benefits and result in penalties. Here’s what you need to do:

1. Update the CRA: You can update your marital status using your CRA MyAccount, by phone, or by mail. This update ensures your taxes and benefits reflect your current status.
2. 90-Day Rule for Separation: If you are separated, you must wait 90 days before notifying the CRA. After this period, your status officially changes to “separated” unless you reconcile.
3. Year of Divorce: If your divorce is finalized during the year, your marital status as of December 31st determines how you file your taxes for that year. For instance:

1. • If divorced before December 31st, you will file as “divorced” for the tax year.
   • If separated for 90 days before December 31st but not officially divorced, you will file as “separated.”

4. Supporting Documentation: Keep all relevant documents, such as court orders, written agreements, and proof of your new status. These may be required for audit purposes or when claiming support deductions.

 

Division of Assets and Tax Consequences

When a marriage ends in Ontario, the division of assets is often one of the most complex aspects of divorce. While the equalization of net family property under Ontario’s Family Law Act ensures fairness, there are significant tax consequences that must be carefully managed. Failing to consider tax implications could result in unexpected liabilities.

How Property Division Affects Taxes

In Canada, the transfer of property between spouses or former spouses under a written separation agreement or court order is generally done on a tax-free basis. This is referred to as a rollover provision by the Canada Revenue Agency (CRA). The tax treatment of divided assets, however, depends on the type of property being transferred:

• Primary Residence: If a matrimonial home is transferred from one spouse to another, it is exempt from capital gains tax as long as it qualifies as a principal residence.
• Investment Properties or Second Homes: Unlike the primary residence, transferring secondary real estate (e.g., cottages or rental properties) may trigger capital gains tax if the value of the property has increased since the date of acquisition.
• Investment Accounts: Assets like non-registered investments (stocks, bonds, mutual funds) are also subject to capital gains tax if they are sold or transferred to one party without the proper rollover provisions.

 

Capital Gains Implications When Transferring Property, Real Estate, or Investments

The capital gains tax is calculated based on the increase in value of an asset from the time it was acquired to the time of transfer or disposition. Here’s how it impacts property division during divorce:

1. Matrimonial Home:

1. • If the home is sold, there is usually no capital gains tax as long as it qualifies for the principal residence exemption.
   • If one spouse keeps the home, they should consider future tax implications if they later sell the property. Any appreciation in value post-transfer will be taxable.

2. Investment Properties or Secondary Homes:

1. • The spouse transferring the property may incur capital gains tax if it is not eligible for the principal residence exemption.
   • To avoid triggering immediate taxes, the CRA allows a tax-deferred rollover if the transfer is done as part of a separation agreement.

3. Investment Portfolios:

1. • Transferring non-registered investments can result in immediate capital gains or losses unless structured as a rollover.
   • Registered accounts like RRSPs and RRIFs can be transferred tax-free under a separation agreement. However, withdrawals by the receiving spouse in the future will be taxable.

4. Pensions and Retirement Funds:

1. • Splitting pensions or retirement assets (e.g., RRSPs, CPP, or workplace pensions) is common during divorce. Transfers under a legal agreement are tax-deferred but will be taxed when the funds are withdrawn.

 

Strategies to Minimize Tax Liabilities during Asset Division

To reduce tax consequences when dividing assets, Ontario family lawyers and tax advisors often recommend the following strategies:

1. Use the Rollover Provision:

1. • Ensure property and investments are transferred using the tax-deferred rollover allowed by the CRA. This defers any tax liability until the receiving spouse sells or disposes of the asset.

2. Prioritize Tax-Advantaged Accounts:

1. • Focus on transferring assets like RRSPs or pensions, as these can be moved tax-free. Be aware, though, that future withdrawals will be taxed at the recipient’s marginal tax rate.

3. Equalize Net Family Property Efficiently:

1. • Instead of splitting individual assets, consider balancing the overall value of property by assigning ownership strategically. For example, one spouse may keep the home while the other takes an equivalent value in RRSPs or non-registered investments.

4. Plan for Future Tax Liabilities:

1. • Consider the after-tax value of assets during negotiations. For example, $100,000 in an RRSP is not equal to $100,000 in a savings account, as RRSP withdrawals will be taxed.

5. Sell Assets Strategically:

1. • If selling property is necessary, plan the sale in a way that minimizes capital gains. For instance, splitting capital gains over multiple tax years can help reduce the tax burden.

6. Consult Financial Experts:

1. • Collaborating with family lawyers, tax advisors, and financial planners ensures the division of assets is structured to minimize immediate and future tax consequences.

 

Spousal Support and Tax Implications

Spousal support, commonly referred to as alimony, plays a significant role in the financial arrangements following a divorce in Ontario. Beyond the emotional and legal considerations, there are important tax implications for both the payor and the recipient that must be addressed to avoid surprises and ensure compliance with the Canada Revenue Agency (CRA).

How Spousal Support Affects Taxes for the Payor and the Recipient

Under Canadian tax law, the treatment of spousal support differs depending on whether the payments are periodic or a lump sum:

1. Payor (Payer):

1. • Regular periodic payments made under a written separation agreement or court order are tax-deductible for the payor. This means the amount paid can be subtracted from the payor’s total taxable income, reducing their overall tax liability.
   • Lump-sum payments, however, are not tax-deductible. If spousal support is paid as a single upfront payment, it cannot be claimed as a deduction.

2. Recipient:

1. • For the spouse receiving periodic spousal support, the payments are considered taxable income and must be reported on their annual tax return. This may increase their overall tax liability.
   • Lump-sum payments are not considered taxable income and do not need to be reported to the CRA.

It is crucial to note that child support payments are treated differently: they are neither taxable for the recipient nor deductible for the payor.

 

Deductibility of Spousal Support Payments

To qualify for a tax deduction, spousal support payments must meet specific CRA requirements:

1. Written Agreement or Court Order:

1. • Payments must be made under a formal written separation agreement or a court order. Informal or verbal agreements do not qualify for tax deductions.

2. Periodic Payments:

1. • The payments must be made on a regular basis (e.g., monthly or annually) rather than as a one-time lump sum.

3. Payments Made to the Spouse:

1. • The payments must be made directly to the recipient spouse or their designated account. Payments made for shared expenses, like mortgage payments, do not qualify unless explicitly stated in the agreement.

4. Separate Spousal and Child Support:

1. • If spousal and child support are combined in a single payment, the agreement must clearly distinguish between the two amounts. Only the spousal support portion is deductible.

How to Structure Payments to Optimize Tax Benefits

To maximize tax efficiency and ensure compliance, family lawyers and tax advisors in Ontario recommend carefully structuring spousal support payments. Here are key strategies to consider:

1. Choose Periodic Payments Over Lump Sums:

1. • Opting for periodic spousal support payments can create tax advantages for the payor, as these payments are deductible. This can reduce their taxable income and overall tax burden.
   • From the recipient’s perspective, while periodic payments are taxable, they provide ongoing financial stability.

2. Clearly Define Payments in the Agreement:

1. • Ensure the separation agreement or court order explicitly outlines the spousal support payment schedule, amount, and duration. This helps avoid disputes with the CRA during tax filings.

3. Use Tax Bracket Differences to Your Advantage:

1. • If the payor is in a higher tax bracket than the recipient, periodic spousal support payments can be particularly advantageous. The payor benefits from a significant deduction, while the recipient pays tax at a lower marginal rate.
   • This arrangement can result in a net tax savings for both parties.

4. Consider Income-Splitting Opportunities:

1. • In some cases, structuring support payments as taxable income for the recipient allows the family unit to benefit from lower overall taxes, especially if the recipient has minimal or no other income.

5. Work with Financial and Legal Professionals:

1. • Collaborating with a family lawyer and tax advisor ensures that the spousal support arrangement is compliant with the CRA, tax-efficient, and financially beneficial for both parties.

6. Plan for Tax Installments:

1. • Recipients of taxable spousal support may need to make quarterly tax installment payments to the CRA to avoid penalties. Proper planning helps manage cash flow and tax obligations.

 

Child Support and Tax Considerations

When navigating a divorce or separation in Ontario, understanding the tax treatment of child support is critical. Unlike spousal support, child support payments are treated differently by the Canada Revenue Agency (CRA), and there are specific credits and deductions available to custodial parents that can help reduce financial burdens.

 

Differences between Child Support and Spousal Support for Tax Purposes

The CRA differentiates between spousal support and child support for tax purposes:

1. Spousal Support:

1. • Deductible: Payors can deduct spousal support payments on their taxes if the payments are periodic and made under a formal agreement or court order.
   • Taxable: The recipient must include spousal support as taxable income.

2. Child Support:

1. • Not Deductible: Payors cannot claim child support payments as a tax deduction.
   • Not Taxable: Recipients do not report child support payments as taxable income.

This distinction ensures that child support funds are dedicated to the well-being of the child without tax complications for either parent.

 

Tax Treatment of Child Support Payments

The current tax-free treatment of child support payments has been in place since May 1, 1997, under the federal Income Tax Act. The key points regarding child support taxation in Ontario are:

• No Deduction for Payors: The parent paying child support cannot claim these payments to reduce their taxable income. This applies regardless of the payment structure or the terms of the separation agreement.
• No Tax for Recipients: The parent receiving child support does not need to include these payments in their taxable income, making it a tax-neutral form of support.

To ensure compliance with CRA rules:

• Child support must be clearly outlined in a written agreement or court order.
• Payments made directly to the custodial parent qualify as child support. Payments made for expenses like school fees or extracurricular activities may require clarification in the agreement.

 

Credits and Deductions Available for Custodial Parents

Custodial parents in Ontario may be eligible for several tax credits and benefits designed to support families and reduce the cost of raising children:

1. Canada Child Benefit (CCB):

1. • The Canada Child Benefit is a tax-free monthly payment designed to assist with the cost of raising children under 18.
   • Eligibility is based on the net family income of the custodial parent. If parents share custody, the CRA typically splits the CCB payments proportionally.
   • It is essential for the custodial parent to update their marital status and custody arrangement with the CRA to ensure accurate payments.

2. Child Care Expense Deduction:

1. • If a custodial parent incurs costs for child care services (e.g., daycare, babysitting, or summer camps), they may claim a deduction on their tax return.
   • The deduction is typically capped at $8,000 per year for children under 7 and $5,000 for children aged 7 to 16.
   • Only the parent with the lower income can claim this deduction, even if they are the custodial parent.

3. Eligible Dependant Credit (Equivalent-to-Spouse Credit):

1. • If the custodial parent is single and responsible for supporting a child under 18, they may claim the Eligible Dependant Credit.
   • This credit reduces taxable income and is particularly valuable for single parents with lower incomes.
   • Parents who share custody cannot both claim the credit—only one parent can apply, typically the one with primary custody.

4. Medical Expenses Credit:

1. • Parents can claim eligible medical expenses incurred for their children on their tax returns. This includes costs for prescriptions, dental care, therapy, and other eligible treatments.

5. GST/HST Credit:

1. • Low-to-moderate-income custodial parents may qualify for the GST/HST Credit, a tax-free quarterly payment that helps offset GST/HST paid on purchases.
   • Eligibility and payment amounts are based on net family income.

6. Disability Tax Credit (DTC):

1. • If a child has a severe and prolonged disability, the custodial parent may apply for the Disability Tax Credit. This non-refundable credit reduces taxable income and provides additional support.

 

Claiming Dependents and Child Tax Benefits

Divorce or separation in Ontario brings unique challenges when determining who can claim a child as a dependent and how child tax benefits, such as the Canada Child Benefit (CCB), are impacted. Understanding the rules set by the Canada Revenue Agency (CRA) ensures both parents comply with tax obligations and maximize the benefits available to support their children.

 

Determining Who Claims the Child as a Dependent Post-Divorce

The CRA has clear guidelines regarding which parent can claim the child as a dependent following a divorce:

1. Primary Custody:

1. • If one parent has primary custody (the child resides with them most of the time), that parent is eligible to claim the child as a dependent and receive applicable tax benefits.

2. Shared Custody (Joint Custody):

1. • In cases of shared custody, where the child lives with each parent approximately 50% of the time, both parents are eligible to claim child-related tax benefits.
   • The CRA will typically split the benefits (e.g., the Canada Child Benefit) equally between the two parents.

3. Eligible Dependant Credit (Equivalent-to-Spouse Credit):

1. • Only one parent can claim the Eligible Dependant Credit for a child each tax year. Parents must decide who will claim the credit, and the CRA will not allow both to do so.
   • If parents cannot agree, the CRA defaults to allowing the credit to the parent with the lower income.

 

How the Canada Child Benefit (CCB) is Impacted

The Canada Child Benefit (CCB) is a tax-free monthly payment from the federal government that helps parents offset the cost of raising children under 18. Here’s how the CCB works after a divorce:

1. Primary Custody:

1. • If one parent has primary custody, they receive the full CCB payment based on their adjusted family net income.

2. Shared Custody:

1. • For shared custody, where the child spends equal or near-equal time with both parents, the CRA considers each parent to have shared custody.
   • In this case, the CRA splits the CCB payments equally between the two parents. Each parent receives 50% of what they would be entitled to as if they were the sole custodian.
   • Parents must inform the CRA of their custody arrangements to ensure accurate payments.

3. Notifying the CRA:

1. • It is crucial to update your custody status with the CRA as soon as possible following a divorce or separation. This can be done through:
     • CRA MyAccount,
     • By phone, or
     • By submitting Form RC66 (Canada Child Benefits Application).

4. Recalculation of Benefits:

1. • The CCB amount is recalculated based on each parent’s adjusted family net income. If one parent’s income changes significantly, it could impact the total benefit received.

 

Guidelines for Joint Custody and Tax Credits

When parents share custody, both parties need to coordinate carefully to ensure compliance with CRA guidelines and avoid claiming the same tax credits.

1. Canada Child Benefit (CCB):

1. • Both parents will receive 50% of the CCB based on their respective incomes.
   • For example, if the total CCB for one child is $6,000 annually, each parent would receive $3,000 if custody is shared equally.

2. GST/HST Credit:

1. • Similar to the CCB, the GST/HST Credit can also be split for shared custody. Both parents must ensure they inform the CRA of their arrangement to avoid duplicate payments.

3. Child Care Expense Deduction:

1. • Only the parent with the lower income can claim the Child Care Expense Deduction, even in shared custody situations.
   • This deduction helps offset costs like daycare, nannies, or after-school care and is crucial for single or lower-income parents.

4. Medical Expenses Credit:

1. • Both parents can claim a portion of the child’s medical expenses, but they must avoid double-claiming the same expense. It’s often more beneficial for the parent with the lower income to claim this credit.

5. Eligible Dependant Credit:

1. • The Eligible Dependant Credit (equivalent-to-spouse credit) can only be claimed by one parent per child per year. Parents must decide who will claim the credit, typically alternating each tax year.

6. Disability Tax Credit (DTC):

1. • If a child qualifies for the Disability Tax Credit, the credit can be transferred to one parent. Parents must coordinate to decide which one will claim it to ensure the maximum tax benefit.

 

RRSPs and Retirement Accounts

Dividing Registered Retirement Savings Plans (RRSPs) during a divorce or separation in Ontario requires careful planning to avoid unexpected tax consequences. While RRSPs are considered part of the net family property under Ontario’s Family Law Act, their division involves specific rules set by the Canada Revenue Agency (CRA).

 

How Dividing RRSPs Affects Taxes

When RRSPs are split between spouses as part of a divorce settlement, the division can have significant tax implications. Here’s what you need to know:

1. RRSPs as Family Property:

1. • In Ontario, RRSPs are included in the equalization process, meaning their value is factored into the total net family property that is divided between spouses.
   • However, RRSPs do not necessarily need to be cashed out or liquidated; they can be transferred tax-free under certain conditions.

2. Avoiding Immediate Tax Consequences:

1. • Normally, withdrawing funds from an RRSP triggers immediate tax for the account holder, as the amount is added to their taxable income for the year.
   • To avoid this, the CRA allows for a tax-deferred transfer of RRSP assets between spouses if the transfer is completed under a separation agreement or court order.

 

Tax Implications of RRSP Transfers Under a Separation Agreement

To ensure a tax-free RRSP transfer, the following conditions must be met:

1. Written Agreement or Court Order:

1. • The RRSP transfer must be part of a formal separation agreement or court order. This document must outline the terms of the division and specify the transfer of RRSP assets.

2. Direct Transfer Between Accounts:

1. • The RRSP funds must be transferred directly from one spouse’s RRSP to the other spouse’s RRSP.
   • This transfer is done on a tax-deferred basis, meaning there are no immediate tax consequences for either spouse.
   • The receiving spouse assumes full ownership of the RRSP and will pay tax on withdrawals in the future, as with any other RRSP.

3. Completion of CRA Form T2220:

1. • Both spouses must complete and submit Form T2220 (Transfer of Amounts Between Spouses or Common-Law Partners on Breakdown of Marriage or Common-Law Partnership) to the CRA.
   • This form ensures that the transfer is processed without tax implications for the payor spouse.

4. Impact on RRSP Contribution Room:

1. • RRSP transfers under a separation agreement do not impact contribution room for either spouse. The transfer is treated as a division of existing assets, not a new contribution.

 

Example of a Tax-Free RRSP Transfer

• Scenario: Spouse A (the account holder) has $100,000 in an RRSP. As part of the equalization process, Spouse A agrees to transfer $50,000 to Spouse B’s RRSP.
• Process:
  • A formal separation agreement or court order is drafted.
  • Form T2220 is completed and submitted to the CRA.
  • The $50,000 is transferred directly from Spouse A’s RRSP to Spouse B’s RRSP.
• Outcome: There are no immediate tax consequences for Spouse A, as the transfer is tax-deferred. Spouse B will pay tax on withdrawals when they access the funds in the future.

 

Key Considerations for Dividing RRSPs

1. Tax Burden on Future Withdrawals:

1. • While the transfer itself is tax-free, the receiving spouse will be responsible for taxes when withdrawing funds from the RRSP in the future.

2. Fair Valuation of RRSPs:

1. • When dividing RRSPs, it’s important to consider the after-tax value of the funds. For example, $50,000 in an RRSP is worth less than $50,000 in cash, as future withdrawals will be taxed.

3. RRSP Loans or Liabilities:

1. • If the RRSP is used as collateral for a loan or includes a Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP), these obligations must be factored into the division. The receiving spouse may inherit repayment obligations.

4. Legal and Financial Advice:

1. • Consult a family lawyer and a tax professional to ensure the RRSP transfer complies with CRA regulations and aligns with your long-term financial goals.

 

Common Mistakes to Avoid in Divorce-Related Taxes

Divorce is a complex process that requires careful attention to tax implications to avoid costly mistakes. Many individuals in Ontario unknowingly make errors when handling their taxes during and after a divorce. Here are the most common mistakes to watch out for and how to avoid them.

 

1. Missing Deadlines for Filing Changes

Updating your marital status and other relevant changes with the Canada Revenue Agency (CRA) must be done promptly. Missing key deadlines can impact your eligibility for certain tax benefits, credits, and deductions.

• Marital Status Updates:

• • If you are separated, you must wait 90 consecutive days before officially notifying the CRA of your separation.
  • If you are divorced, update your status as soon as the divorce is finalized.

• Impact on Benefits:

• • Missing deadlines can result in overpayments or underpayments of benefits like the Canada Child Benefit (CCB), GST/HST Credit, and other tax credits. Overpayments may need to be repaid, leading to financial stress.

• How to Avoid This Mistake:

• • Use CRA MyAccount, call the CRA directly, or submit Form RC65 (Marital Status Change) to notify them of changes.
  • Ensure all changes are updated before December 31st to reflect your correct status for the tax year.

 

2. Incorrectly Claiming Deductions

Another common mistake is incorrectly claiming tax deductions or credits, particularly when it comes to spousal support, child support, and eligible dependant credits.

• Spousal Support vs. Child Support:

• • Spousal Support: Deductible for the payor and taxable for the recipient if the payments are periodic and made under a written agreement or court order.
  • Child Support: Not deductible for the payor and not taxable for the recipient. Misclassifying child support as spousal support can trigger audits and penalties from the CRA.

• Eligible Dependant Credit:

• • Only one parent can claim the Eligible Dependant Credit for a child each tax year. If both parents claim it, the CRA will disallow one claim, potentially leading to penalties.
  • Parents should agree in advance on who will claim this credit, typically alternating years in shared custody arrangements.

• Child Care Expense Deduction:

• • Only the parent with the lower net income can claim this deduction, even in joint custody situations.

• How to Avoid This Mistake:

• • Clearly outline support payments in a written separation agreement or court order.
  • Coordinate with your former spouse to avoid double-claiming credits like the Eligible Dependant Credit or child care expenses.
  • Keep receipts, court orders, and written agreements as proof for CRA audits.

 

3. Failing to Update the CRA on Your Marital Status

One of the most overlooked steps in divorce-related taxes is failing to update the CRA on changes to marital status. This mistake can lead to:

• Overpayment or Underpayment of Benefits:

• • The CRA uses marital status and household income to calculate benefits like the Canada Child Benefit (CCB), GST/HST Credit, and other income-tested programs.
  • Failing to report a separation or divorce may result in receiving incorrect amounts, which may need to be repaid.

• Incorrect Tax Filing:

• • If your marital status is outdated, your tax return may be filed under the wrong category (e.g., “Married” instead of “Separated” or “Single”), leading to penalties or reduced benefits.

• How to Avoid This Mistake:

• • Notify the CRA immediately of any changes to your marital status using one of the following methods:
    • CRA MyAccount (online portal)
    • By phone (1-800-387-1193)
    • Submit Form RC65 (Marital Status Change)
  • Update your status within the year it changes to ensure tax returns and benefits reflect your accurate situation.

 

How a Divorce Lawyer Can Help with Tax Implications

Divorce is not only an emotionally challenging process but also a financial one with significant tax implications. Whether you are dividing assets, structuring spousal support, or navigating child-related tax benefits, working with a lawyer familiar with divorce and tax law in Ontario —particularly in cities like Toronto—can help you avoid costly mistakes and protect your financial interests.

 

Why Consulting a Lawyer Familiar with Divorce and Tax Law in Toronto Is Essential

1. Understanding Complex Family and Tax Laws:

1. • Divorce lawyers in Toronto specialize in both the Family Law Act and federal tax regulations set by the Canada Revenue Agency (CRA).
   • Lawyers can ensure that tax implications are addressed when structuring separation agreements, spousal support, and property division.

2. Tax-Efficient Spousal and Child Support Agreements:

1. • A lawyer ensures spousal support is structured to maximize tax benefits for both parties:
     • Payors benefit from tax deductions for periodic payments.
     • Recipients understand their taxable income obligations.
   • For child support, a lawyer ensures that payments comply with CRA rules (non-deductible for payors and non-taxable for recipients).

3. Fair and Tax-Effective Asset Division:

1. • Dividing assets like RRSPs, pensions, and investment properties can create unexpected tax burdens if not handled properly.
   • A lawyer ensures assets are transferred under a legal agreement or court order, qualifying for CRA exemptions such as:
     • Tax-free RRSP transfers (Form T2220).
     • Capital gains rollovers on matrimonial homes and investment properties.
   • Without legal expertise, a poorly structured agreement may trigger immediate tax consequences, such as capital gains tax or withdrawal penalties.

4. Navigating Shared Custody and Tax Benefits:

1. • Lawyers help determine eligibility for credits and benefits like the Canada Child Benefit (CCB), GST/HST Credit, and the Eligible Dependant Credit.
   • They ensure the agreement reflects clear custody arrangements to avoid disputes over who claims tax credits.

5. Avoiding Common Tax Mistakes:

1. • Divorce lawyers ensure compliance with CRA guidelines by:
     • Updating marital status on time.
     • Structuring spousal support to avoid misclassification.
     • Ensuring proper documentation for all asset transfers and support payments.

 

How Lawyers Collaborate with Tax Professionals to Protect Your Financial Interests

1. Comprehensive Financial Planning:

1. • Divorce lawyers often work alongside tax professionals (e.g., accountants or financial advisors) to evaluate the after-tax value of assets and ensure fair division.
   • For example, an RRSP worth $100,000 has a lower after-tax value than a non-registered savings account, as RRSP withdrawals are taxed.

2. Minimizing Tax Liabilities:

1. • A lawyer and tax professional can structure agreements to defer taxes wherever possible:
     • Use of CRA-approved rollovers for property transfers.
     • Tax-efficient division of pensions and retirement funds.
     • Proper allocation of taxable and non-taxable support payments.

3. Maximizing Tax Credits:

1. • Lawyers collaborate with tax professionals to ensure custodial parents claim all eligible tax benefits, such as:
     • Canada Child Benefit (CCB) for single or shared custody.
     • GST/HST credits.
     • Child care expense deductions.
   • They also ensure there’s no double-claiming of credits, which could lead to penalties from the CRA.

4. Ensuring Compliance:

1. • Lawyers and tax professionals work together to verify all documentation—court orders, support agreements, and custody arrangements—aligns with CRA requirements. This minimizes the risk of audits and disputes.

5. Post-Divorce Financial Planning:

1. • Beyond the immediate divorce settlement, lawyers and tax professionals help clients plan for their long-term financial health, addressing issues such as:
     • Retirement planning (e.g., RRSP contributions and withdrawals).
     • Future tax obligations on asset dispositions.
     • Budgeting for spousal and child support payments.

Changing Your Filing Status after Divorce Child Support and Tax Considerations Claiming Dependents and Child Tax Benefits Division of Assets and Tax Consequences Example of a Tax-Free RRSP Transfer RRSPs and Retirement Accounts Spousal Support and Tax Implications