There's never a good time to end a marriage -- but combining the emotions and stress of a divorce with tax troubles can be a recipe for emotional disaster. Unfortunately, Canadian laws can operate to give you some messy tax issues even just upon your initial separation from your spouse. You'll often need to be proactive to avoid being assessed with penalties or mistakenly taking benefits to which you are no longer entitled. Read on to learn more about how merely separating from your spouse can quickly change your tax status, as well as the steps you should take upon your initial separation to help preserve your rights and minimize any negative financial implications.
Why must you be proactive when it comes to separation and taxes?
Under Canadian law, you and your spouse are legally separated on the 90th day after you and your spouse are no longer living together. Once you've passed this mark, the date of your separation becomes the date you or your spouse moved out of the marital home.
For tax purposes, this provision means that 90 days after you and your spouse decide you no longer want to live together, your finances are considered legally separate. This won't happen until the 90 day period has passed, even if the marriage is irretrievably broken -- so if you've separated just a month or two before your tax filing is due, you'll be required to file as married even though you've been separated for a period of time.
In either situation, you'll want to consult an accountant along with a divorce attorney to ensure that your taxes are promptly and legally filed. If you and your spouse are required to file a married return but you're unable to get him or her to cooperate in providing necessary information, you'll likely be able to go back and file an amended return once your separation is finalized. However, your attorney and accountant will need to ensure that the proper paperwork is filed to avoid an audit.
What should you do to minimize tax consequences of your separation?
Once you've passed the 90-day mark and are legally separated, you'll want to notify the Canada Revenue Agency of your change in status. Because your spouse's income will no longer be counted in your total household income, you may qualify for additional tax credits (particularly if you have primary custody of young children). Informing the CRA of this change as promptly as possible can ensure that you get all the funds to which you're entitled.
If you are required to pay spousal support as a condition of the divorce, you may want to negotiate with your spouse and attorney regarding the start date of these payments. In future years, all the spousal support funds you pay are taxed as income to your spouse, and deductible from your own income taxes, lowering your total bill. Your child support payments are also deductible from your income taxes. However, during the tax year in which your divorce is granted, you'll only be permitted to claim one of these deductions, not both.
So for example, if you paid $10,000 in child support and $5,000 in spousal support during the year in which your divorce was finalized, you'll be able to deduct only the $10,000 for child support, and will be required to pay your normal tax rate on the $5,000 in support paid to your spouse. However, by putting off that spousal support payment until the next calendar year, you'll be able to take both deductions that year. If it looks like your divorce will be finalized toward the end of the year, this may be a worthwhile conversation to have with your spouse. For more information on divorce and separation laws check out firms like Phelps Donald B Law Corp.