Many Canadians between the ages of 25 to 64 are married or in common-law relationships. Unfortunately, not every relationship is destined for a “happily ever after”. Divorce rates in Canada have steadily increased over the past 20 years, with about 2.71 million Canadians obtaining a legal divorce in 2020 alone.1
Major breakups can leave us with many questions and new waters to navigate, income taxes being one of them. There’s a lot to know about filing taxes as a newly single person, especially if you’re paying child or spousal support. It’s important to note that in Canada, legal marriage and common-law relationships are deemed equal in the eyes of the law. So, regardless of the type of relationship you were in, this information likely applies to you.
Important Information to Know Before Tax Time if You’re Newly Divorced
Timing is everything. It’s essential to consider when your divorce will be finalized before filing your taxes.
If you separate or file for divorce after December 31st, you’ll still have to file your income tax for that calendar year as a married person.2 In this case, it’s likely in your best interest to file a joint return, as combining your incomes gives you a higher deduction.
Until your divorce is finalized, you’ll submit your tax return as “separated”. After it’s finalized, you submit your taxes as “divorced”. Note that in terms of your tax return, not much will change between your “separated” and “divorced” status, but the Canada Revenue Agency (CRA) expects to be abreast of these status changes. You should ensure that you’re taking advantage of any applicable tax deductions based on each marital status.
Once the separation is finalized, you must communicate this change with the CRA as soon as possible. The CRA expects to know about your change in marital status within the month of finalization. Communication with the CRA can be via phone, online, or mailing a completed marital status change form.
As you plan for a divorce, it’s essential to consider three main expenses associated with this process: legal fees, spousal support, and child support. Each of these is taxed differently. To help simplify the process, here’s a breakdown of what’s considered a deductible and non-deductible expense during your divorce process.
What Are Taxable (Non-Deductible) Divorce Expenses?
Let’s walk through the aspects of divorce that are considered taxable:
Divorce Legal Fees
The legal fees paid to your lawyer to prepare the separation or divorce agreement or to establish custody are not deductible on your tax return.
Spousal Support
- If you’re receiving financial support from your former spouse, you may be required to claim it as taxable income on your tax return.
- Periodic (for example, monthly) spousal support payments are taxed as extra income for the recipient.3
What are Non-Taxable (Deductible) Divorce Expenses?
These divorce expenses aren’t subject to taxation. This list includes any deductible divorce expenses you can claim on your tax return:
Divorce Legal Fees
- If you paid legal fees to enforce your right to a specified child support or spousal support amount or used a lawyer to defend against a reduction in support payments, you can claim those as a deduction on your tax return.
Child Support Payments
- Unlike spousal support, child support payments are considered non-taxable income for the recipient.
- Whoever assumes responsibility for raising the children can receive the Canada Child Benefit (CCB) if eligible. The CCB is considered non-taxable income. If you share custody, each parent can claim the benefit as long as they are each deemed to be the primary caregiver of the children when they are residing with them.
Spousal Support Payments
- Generally, spousal support payments are considered a deductible expense for the payer.
- If you have received a lump sum support payment as part of your separation agreement, this may be considered non-taxable income for the recipient. There are, however, specific circumstances in which the lump sum may be taxable to the payee. A tax specialist is instrumental in helping you navigate these criteria to ensure you have access to the tax deductions that apply to your situation.
Going through a divorce or separation is a significant life change. There are a lot of new things to consider. Changing how you do your taxes is, of course, one of them. The CRA website is the best place to reference when working out the new requirements for your income taxes post-separation. It’s also wise to consider working with a trusted tax specialist to help you navigate these new expenses and understand what you need to claim as income.
A tax specialist can also guide you through any changes in tax reductions or nonrefundable tax credits you’re eligible for, now that your net family income no longer includes your spouse.
While separation and divorce may be challenging, knowing how to move forward in a new situation with reliable information and trusted help can make the process smoother.
This article is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant, or other professional advisor when tax planning.
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