When going through the challenges and heartache of a divorce, most people are thinking about hiring a lawyer—not sorting out their taxes.
But the tax implications of divorce can be complex and a surprise to many. To avoid being blindsided by a tax hit when all you want to do is heal, let’s tackle four important questions around filing taxes for the first time after a divorce.
- The CRA considers you legally separated once you’ve been living separately and apart for at least 90 days.
- It’s important to notify the CRA of your separation so they can adjust credit and benefit payments that may be affected by the change in your family situation and household income.
- Ongoing spousal support payments are taxable to the recipient and tax-deductible for the person who pays them.
1. Why does the CRA need to know that my spouse and I are calling it quits?
Ending your marriage can change how much taxes you owe or the benefit amounts you can claim based on your updated family income, the number of children in your care, and the province or territory you live in.
So notifying the CRA about a change in your marital status also ensures you’re receiving the proper payment amount for your GST/HST credit and your Canada Pension Plan (CPP) credits.
2. How soon should I tell the CRA about my divorce?
The CRA only considers you legally separated if you’ve been living apart for at least 90 days, so wait the full three months to let them know. At this point, they can start processing changes to your benefits and credit payment amounts. The adjustment will start the month after your marital status has changed.
If you receive your benefits via direct deposit, remember to inform the CRA if your banking information has changed so your cheques aren’t deposited into the wrong account.
Québec residents should also advise Revenu Québec.
3. What if I have children?
Filing your tax return will look different after your divorce if you have children. For example, if you have children under 18, the CRA will recalculate your Canada Child Benefit (CCB) and once you are separated/divorced, you may be able to claim the amount of a dependent. While there are certain legal fees you can claim on your tax return depending on your situation, read more about filing your taxes after a divorce with children.
4. What happens to our shared assets after a divorce?
Assessing your finances and dividing your assets can be challenging, no matter how friendly the split. Even the math isn’t clearcut. When negotiating who gets what, it pays to consider the tax implications.
Here are some common assets to be mindful of and how you can make the most out of your situation:
Registered Retirement Savings Plans (RRSP)
Thinking of cashing out your RRSP to come up with the funds to put toward the divorce settlement? Don’t do it! You’ll trigger a withholding tax of up to 30% for the privilege of cashing out before retirement.
Instead, take advantage of the tax exception that lets one spouse transfer their RRSP to the other in the event of a divorce. The same applies to RRIFs, TFSAs and Spousal RRSPs.
Capital assets
Capital assets, such as non-registered investments, a cottage, or a rental property, can also be transferred on a tax-deferred basis between spouses. That means when you give away ownership of a capital asset to your ex, there are no tax implications until the asset is sold (which triggers a capital gains tax for the person who owns it).
Talk to your ex-partner about meeting with a professional before selling off any of your life savings. This way you can optimize the situation for the both of you, to avoid giving away your money to the government, due to hasty decisions. The last thing anyone should do is make big decisions, while under emotional stress. You built a life together, it is a responsibility to unravel it at a pace you can both feel good about. Hiring a professional will give you access to unbiased wisdom and support.
The family home
Figuring out how to divide something as sentimental (and valuable) as your family home can be one of the most fraught line items of all. Options range from having one person buy the other out to selling it outright. Less common choices include keeping the house under both names and turning it into a rental property, or even retrofitting the home into a duplex with separate living quarters.
Each possibility comes with its own set of financial and lifestyle implications that are worth talking through with a professional. Québec residents should consult the Revenu Québec website for province-specific tax implications of dividing their assets.
Are support payments tax deductible?
Support payments are amounts paid by one spouse to the other based on a court order when they go their separate ways. While child support is generally considered nontaxable, on-going payments for spousal support (also referred to as “alimony”), are tax-deductible for the person who pays them and taxable to the person who receives them.
The bottom line
Divorce is never easy. And you don’t have to go it alone. Each province, including Québec, has its own resources and organizations to provide services and information designed to help your and your family navigate this difficult chapter.
With knowledgeable experts who understand the tax implications of going your separate ways, we’re here to work through your questions—and even do your taxes for you from start to finish—so you get the support you deserve and focus on better days ahead.
Big life changes? No problem
TurboTax helps you find deductions and credits you're eligible for to save you money at tax time. And, you can connect with a tax expert if you have questions.
