Divorce: Minimizing Financial Set-backs Through Tax Efficiency

Christine Steendam

Divorce can be a huge set-back in one’s financial plan. In Canada, 38% of marriages end in divorce, and 42% of those end between 10 and 24 years of marriage.* With the help of qualified and knowledgeable financial and taxation advisors, the financial hit of divorce can be minimized.

At this stage in life, many people are established financially with a house, investments, and savings and it’s important to know how divorce affects finances, and the unique tax implications to keep in mind.

Following are some tax tips to help minimize taxes when couples separate or divorce:

Periodic spousal support payments are considered taxable income to the receiving spouse; however, they are tax-deductible to the paying spouse. A lump-sum settlement, on the other hand is neither taxable or deductible.

Child support payments are not deductible (since 1997) to the paying spouse and are received tax-free by the receiving spouse. In other words, if your client receives child support payments, they are not included in taxable income.

When it comes to legal fees and taxes, they are generally deductible if they related to:

  • Collecting late support payments
  • Establishing a right to support
  • Increasing your support
  • Make child support payments tax-free

However, if you are the spouse paying support, legal fees and fees related to child custody and visitation issues are not generally deductible.

If deductible legal fees exceed the income in a year, it is considered a non-capital loss and can then be carried forward or backward to other tax years. Use form T1A to do so; a qualified DFA-Tax Services Specialist™ can help.

Who can claim the eligible dependant amount? This is not a simple question with a simple answer. In fact, in shared custody situations, either spouse may be entitled to the eligible dependant amount, as long as a child resides with them for some time during the year. However, a child can only be claimed by one parent. If there is more than one child, and custody is shared, each spouse may claim the amount for one child. If there is one child, and custody is shared, it will have to be decided who will claim the credit.

Child-care expenses can be deducted by the parent who incurred the expense while the child lived with them.

In the case of the tuition credit , a student can transfer this credit to either parent, but may not transfer a portion to both, which will require agreement between you and your spouse.

Canada Child Benefit. If one parent has custody of the children, then the Canada Child Benefit is to be paid to that parent. However, in the case of shared custody, the parents can apply to have the payment split equally between them.

Next time: Dividing Assets on Separation or Divorce

* Statistics Canada catalogue no. 85-002-X (page last updated November 30, 2015). Link: https://www150.statcan.gc.ca/n1/pub/85-002-x/2012001/article/11634-eng.htm

Additional educational resources: Study online to become a DFA-Tax Services Specialist™ . Until October 31, you can save $200 on tuition when you enrol in a designation program. And, when you enrol before September 30, you pay no tuition instalment fees (up to an additional $234 in savings).