Tax issues

There are many tax issues in family law. I am not an accountant so I would defer to your accountant’s advice.

You can also search the website of, or call, the Canada Revenue Agency to see what information you can find. There are several issues that we run into frequently so I want to flag these as potential issues. This information can change rapidly so this section is not intended as legal or tax advice – but rather is to alert you to issues that should be addressed.

First, spousal support is taxable to the recipient and deductible to the payor if the payments are periodic e.g. monthly, and they are made pursuant to a separation agreement or a court order. Lump sum spousal support is not tax deductible.

Second, child support is not taxable to the recipient or deductible to the payor. This changed with the introduction of the Child Support Guidelines on May 1, 1997. If there is an agreement or order that pre-dates May 1, 1997 then the child support may be deductible.

Third, there is the Canada Child Benefit. This is sometimes referred to as the ‘baby bonus’. If the children live primarily with one parent then that primary parent is entitled to claim the child tax benefit. If the children live equally with both parents then the policy of the Canada Revenue Agency (C.R.A.) is to award the child tax benefit to one parent for six months of the year then to the other parent for the other six months of the year.  It is crucial here to word your child support provisions properly or one of the parties’ claim may be refused.

Fourth, there is the eligible dependent credit. If you are separated and the children reside with you primarily then you may be able to claim the eligible dependent credit. This is a credit you claim on your income tax return which reduces your income tax payable. The C.R.A. is in the process of revising its policy in more complicated situations e.g. if parents are separated with two children and have shared parenting e.g. equal time, then can each of them claim the eligible dependent credit for one child? If you have a new partner then you may not be able to claim the eligible dependent credit.

Fifth, if the transfer is completed between spouses pursuant to a written separation agreement or court order one spouse can transfer R.R.S.P.s to the other spouse without triggering immediate tax consequences. This can be a useful tool to equalize property or to pay spousal support.

Sixth, there are section 7 expenses. It is the after tax cost of expense that is shared. For example, if the children live with Dad post-separation and Dad pays $5,000.00 a year in daycare expenses he would claim these on his taxes. If he saves $1,000.00 in taxes then the after-tax amount of $4,000.00 would be shared by the parties in proportion to income. The situation of how to claim daycare expenses in a shared parenting situation is more problematic. Sometimes clients each pay his or her share of the expense, get a receipt for that payment, and claim that amount on his or her tax return. You should check with your accountant in this situation to determine if the C.R.A. will permit this.

Seventh, there are capital gains. Most people own one piece of real estate – their home. There is no capital gain payable on the increase in value in a principal residence. However, if there are two properties then there may be capital gain taxes payable on the increase in value. We see this situation where there is a house and the cottage. You want to ensure that the capital gain is taken into account when you are calculating the division of assets.