Tax implications of Divorce or Separation

Divorce Or Separation!

The breakdown of a marriage or common-law relationship may include financial settlements, custodial decisions and various accompanying tax consequences.

Attribution rules

Attribution of income ceases to apply when a couple is separated. However, capital gains attribution does not cease until divorce (for married couples), unless the parties jointly elect to have it cease on separation.

Support payments

If an individual makes support payments, they may deduct them for tax purposes, provided certain conditions are met. Generally, the payments must be payable periodically to their current (or former) spouse, or partner, and in accordance with a signed separation agreement or a court order. In addition, certain payments to third parties under the terms of a separation agreement may also be deductible. The individual can also claim a deduction for payments made before signing an agreement or obtaining a court order, provided that the contract is signed, or the order is obtained, before the end of the following year. The agreement or order must deal explicitly with these payments.

Deductible alimony payments must be included in the recipient’s income in the year received. Child support is treated differently than spousal support in that the paying parent cannot deduct the payments, and the recipient parent would not include them in their income.

Professional fees

Legal fees paid to obtain a separation or divorce are not deductible for tax purposes. However, the individual receiving support may deduct legal fees paid to establish or increase the amount of support.

Tax credits and deductions

After separation, a parent may claim an eligible dependent credit for a child under the age of 18 living with that parent. The credit is not available to the parent who is paying support. In cases where there is more than one child, and both parents support and house the children, each parent can claim the credit in respect of one child. Both eligible parents must agree on who is entitled to claim the personal tax credits for a particular child, or neither will be allowed to make a claim. Child-care expenses may only be claimed by the parent living with the child, provided the deductible conditions are met. If the children live with both parents, each parent may claim a share of the expenses for the period of time their children live with them. Either parent can claim the transfer of tuition credits, but the total claim cannot exceed the maximum per child.

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