Claiming child support and maintaining certain benefits add complexity to tax filing.bymuratdeniz/iStockPhoto / Getty Images
Marital breakdowns often mean dividing assets and a big change in tax filings.
Upon separation, couples need to file their updated marital status with the Canada Revenue Agency (CRA). To avoid confusion, both spouses need to give the CRA the same separation date and have proof on hand that they’re living at separate addresses or separate quarters of the home, says Renée le Nobel, chartered professional accountant and collaborative divorce expert in Vancouver.
That usually involves a statement from a lawyer.
If there are dependant children involved, Ms. le Nobel says clients also need to advise the CRA of the parenting arrangements.
“They need to file Form T1158 along with the parent agreement to show the registration on file with the CRA,” she says.
Single-parent households may qualify for the eligible dependant credit, she adds, nothing that the child can only be claimed by one household. She says the qualifying parent must parent the child more than 40 per cent of the time and not be solely responsible for paying child support. If child support flows only one way, the CRA considers that one parent has the sole obligation for child support.
“In shared parenting arrangements with two children, each household can claim the credit by assigning a different child to each parent,” Ms. le Nobel says.
Spousal support rules
Spousal support is tax-deductible for the spouse providing the money, says Blair Corkum, certified financial planner at Corkum Financial Planning Inc. in Charlottetown. That’s non-negotiable, regardless of what’s written in the couple’s separation agreement.
For example, he’s seen agreements drafted by lawyers that state one ex-spouse can’t deduct the spousal support so the other ex-spouse won’t have to pay taxes on the amount received.
“It is not a choice,” Mr. Corkum says. “And if the spousal support is paid directly toward certain expenses instead of being paid directly to the other spouse because of financial management problems, the agreement has to be worded in a very specific way to make sure that [payments] are taxable and deductible.”
Ms. le Nobel says the CRA tends to audit spousal support deductions, asking clients to submit their payment receipts or cancelled cheques. She notes that many clients pay the support via electronic transfer, but they need to ensure the recipient’s name is on the receipt to comply with the CRA. The receipts should be set up like an invoice and have both spouses’ names on them, she adds.
Sometimes, there are issues with spousal support payments because the amount may increase every year to keep up with the cost of living, as does the amount of child support. Every time support changes, the payor needs to file an updated form T1158 with the CRA noting the change.
To qualify for the deduction, Ms. le Nobel says the payments need to be made in the same tax year.
She notes the amount of child support payments often changes in the middle of the year and parents may forget to inform the CRA of the adjustments. If the updated payments don’t match what the CRA has on file, the CRA adjusts the tax return and takes the difference out of the spousal support deduction, causing confusion and back and forth with the tax agency for months to years.
Evan Parubets, associate director of financial planning at Steadyhand Investment Funds Inc. in Toronto, says he emphasizes strategies for the lower-earning divorced parent who has full custody of the children to lower their net income, usually with RRSP contributions, to ensure they receive the Canada Child Benefit (CCB), which is income tested. The lower-earning spouse receives up to $648 a month tax-free for kids under 6, and up to $547 a month for children between the ages of 7 and 17.
“It gets clawed back depending on your income,” he says.
In the case of shared custody, each parent gets 50 per cent of the CCB amount.
However, clients may require different strategies. For example, Mr. Parubets notes how one divorced client with two young children only plans to contribute to an RRSP to lower her net income until her children turn 18 to ensure she receives the CCB. Once they’ve aged out of the benefit, she plans to shift her money into her tax-free savings account for the rest of her working life.
“It’s a bit of a Jenga puzzle,” he says.
Estate planning is another consideration for divorced parents. When children are minors, spouses may want to maintain life insurance policies with the ex-spouse as a beneficiary to ensure they can take care of the children.
Some parents are also concerned about inheritances in case their children go through a divorce. For this reason, Mr. Corkum advises parents to make inheritances directly in the child’s name in the will, unless they want to use more complex and expensive trust arrangements. That ensures the money goes to the child and won’t include their future spouse.
“Should the child go through a divorce, the child will get to keep that asset alone unless the child decided to share it after receiving it and it becomes a family asset,” he notes.