Support payments, lawyer fees, splitting shared property – most things that come with divorce affect your tax situation. So who pays and what does it mean for your taxes?
Legal Fees
These can run you up to $20,000; more if your case ends up going to court. Generally, legal fees for divorce proceedings are not tax-deductible. Check out this TurboTax article, Legal Costs Relating to a Breakdown in Marriage, for all the details on which legal fees you may be able to claim as a deduction and where to enter them on your tax return.
Child Support and Spousal Support
If you are the recipient of child support payments, you don’t have to pay taxes on the child support payments given to you by your ex, and your ex (the payer) cannot claim a deduction for the payments on their tax return. These rules changed in May 1997 and apply to any court orders or rulings made after that specific date.
Spousal support payments are a tax deduction for the payer and must be reported as income for the recipient. You’ll need a written agreement or court order with the agreed-upon payment amount. Keep in mind, spousal support paid in a lump sum is not tax-deductible, so you’ll need to consider which option is best for you.
CRA requires that all support payments made and received be reported on your tax return on the following lines:
- Recipient reports the amounts as income on Line 12799 Total and Line 12800 Taxable Amount of Support Payments Received.
- Payer reports the amounts as a deduction on Line 21999 Total and Line 22000 Allowable Deduction of Support Payments Made.
Canada Child Benefit (CCB)
Whoever assumes responsibility for raising the kids can receive the Canada Child Benefit (CCB) if eligible. If you share custody, each parent can claim the benefit as long as they’re each the primary caregiver of the child during the time the child resides with them. Each parent will get 50% of the payment they would have received if the child lived with them all of the time.
Dividing Property and Assets
Splitting your assets can be challenging, even when done amicably. More than likely, one of you will need to make an equalization payment. Equalization payments aren’t taxed but property transfers are. If your ex is buying your share of a property, you can both agree to postpone the capital gains tax.
Additionally, transferring funds between Registered Retirement Savings Plans (RRSPs) comes with no tax consequences and could be a good option for both parties. When transferring funds between RRSPs, CRA requires this form to be completed for each registered plan: Form T2220 – Transfer from an RRSP, RRIF, PRPP or SPP to Another RRSP, RRIF, PRPP or SPP on Breakdown of Marriage or Common-law Partnership.
Childcare Maximums Still Apply
Deductions such as childcare costs or daycare fees have their values capped depending on the age of the child. If you and your former spouse both pay child care costs, it’s important to note that the dollar limit on child care still applies.
For example, if you and your ex both pay fees for after-school care for your 10-year-old child, you both may be eligible to claim the fees at tax time – but only up to the maximum/child. For a 10-year-old child, the maximum credit is generally $5,000. If you and your ex each paid $3,000 last year, your combined total for your child’s care would be $6,000 – a full $1,000 over the max. Only $5,000 could be claimed in total so it’s up to you and your ex to work out who’s claiming what.
The maximum limits can be found on Form T778 Child Care Expenses Deduction