Separation, Divorce and Taxes

Once spouses decided to separate and divorce, generally the last thing anyone thinks about is the tax implications of such actions. This article will discuss basic tax implications with regards to separation and divorce and legal requirements with regards to tax and separation.

It is important to note that when you and your spouse divide up your real estate, savings, investments, and pensions this is referred to as the division of assets. By paying your spouse their half of the assets this is referred to as equalization payments as well as an asset transfer. Where any of these payments are made in cash there are no tax implications during the divorce as it is considered to be money that you have already been taxed on. However, when assets are transferred, such as a car or investment normally these are taxed. These would normally be taxed at the difference between the current market value and what you initially paid for them. When it comes to the transfer of asset it is of the utmost importance to involve a financial professional who works specifically with divorce in order to provide options for temporary tax exemptions. Such professionals are referred to a certified divorce financial analyst.

With regards to child support payments it must be noted that there are no tax implications. This is mainly because child support payments are not considered an income for the person who is receiving it, as such there is no tax deductible on the person who pays and receives the child support payments. However, with regards to spousal support there are tax implications for both the person making the payments and the person receiving it. It must be noted that there are available options that reduce the taxation on spousal support these include:

Periodic spousal support payments – periodic support payments are monthly payments. Periodic payments are taxed as extra income for the recipient and are deduction from the one who makes payment.

Lump sum payment – lump sum payments are not taxable or deductible if the support payments are made according to a properly prepared separation agreement.

In accordance with the Divorce Act an individual is considered to be separated if he or she lives independently from their spouse while staying in the same home. However, when it comes to the Canada Revenue Agency (CRA) it must be noted that a spouse is considered separated when he or she lives separate and apart from their spouse for a period of 90 days or more as a result of a breakdown in their relationship. Any separation that is less than 90 days is not considered a separation for the purposes of Child and Family Benefits with regards to divorce and taxes. With regards to the issue of living separately while it is possible for spouses to be considered legally separated while living in the same home, according to the CRA the spouses are not considered separated. This is because the CRA has different standards when it comes to divorce and taxes as compared to the legal system.