The Common Sense Guide to:
Divorce and Taxes
What is important to understand about divorce and taxes in Ontario?
Financially Smart Divorce Strategies
How Divorce Has Tax Implications
During and following a divorce,
your tax situation changes significantly.
Here are the most commonly asked questions.
When you’re going through a divorce in Ontario, understanding the tax implications isn’t just a smart move—it’s absolutely essential if you want to avoid unpleasant surprises down the road.
Let’s break down a common issue: splitting assets. Imagine you and your spouse have $100,000 in a bank account and another $100,000 in an RRSP. You decide to split it evenly—your spouse takes the cash, and you take the RRSP. Seems fair, right? Not quite.
Your spouse walks away with $100,000 in hand, tax-free. But the $100,000 RRSP you took comes with a tax hit when you withdraw it. If there’s a 20% tax, you’re left with $80,000. That’s a $20,000 difference.
To make things fair, you’d need an extra $10,000 from the cash. So, instead of just taking the RRSP, you also get $10,000 from the bank account. Now, both of you end up with $90,000.
The takeaway? Divorce isn’t just about splitting things evenly—taxes play a big role too. Here’s how to get it right:
Talk to a Divorce Money Pro: CDFA
A divorce financial expert, like a certified divorce financial analyst, can guide you on how different assets are taxed.
Double Check Asset and Debt Values
Make sure you know exactly what each asset is worth, including any future taxes.
Think Financially Smart and Long Term
Look ahead. Consider how your choices now might impact your finances down the road.
Get Legal Advice
Work with a divorce team that understands both the financial side AND the legal side. They can ensure your agreement covers the tax implications and is fair.
Never sign an Separation Agreement without independent legal advice.
Talk With Your Ex
Keep the lines of communication open with your ex-spouse. Understanding the financial side together can make the process smoother.
Divorce is a mix of emotions and financial decisions. Bringing in experts helps you solve these financial puzzles and make smart choices for your future.
Canada Revenue Agency (CRA)
When Does Canada Revenue Agency Consider You Separated?
The Canada Revenue Agency (CRA) considers you separated for tax purposes only when you have been living in separate locations and apart from your spouse or common-law partner for more than 90 days. This is different from the Family Law Act, which does not require you to be living in different homes to be considered “separated.”
Living apart for less than 90 days is not recognized as a separation by the CRA for the purposes of Child and Family Benefits when it comes to divorce and taxes. Once you have been living apart for 90 days, the effective date of your separated status, for tax purposes, is the day you started living separate and apart.
Can We Live in the Same House and Be Considered Separated?
Legally, it’s possible to be “separated” while still living in the same house, but the CRA will not recognize a separation if you continue to live together in the same household. The CRA has different standards for divorce and taxes compared to the legal system.
An exception might occur if you have self-contained separate living quarters within the same household. However, if you continue to share parenting and financial responsibilities while residing in the same home, the CRA will not consider a separation to have taken place for the purposes of the Canada Child Tax Benefit or Goods and Services Tax/Harmonized Sales Tax (GST/HST).
Understanding these tax issues is critical to making informed decisions during your divorce in Ontario.
Consulting with a tax professionals who understands the nuances of divorce will help you navigate these complexities and avoid costly mistakes.
The Common Sense Divorce focuses on what really matters—keeping your family’s stability intact.”
For more than 25 years you have witnessed Gail Vaz-Oxlade‘s trademark straight-up money wisdom, both on Radio and Television, most notably as host of TVs Till Debt Do Us Part, Princess and Money Moron. Gail is a best-selling Canadian financial author.
Understanding these tax issues is critical to making informed decisions during your divorce in Ontario.
Consulting with a tax professionals who understands the nuances of divorce will help you navigate these complexities and avoid costly mistakes.
The Common Sense Divorce focuses on what really matters—keeping your family’s stability intact.
Dividing Assets and Taxes
How to Transfer Assets?
When you and your spouse divide up your real estate, savings, investments and pensions, this is called the division of assets. Paying your spouse their half of the assets is called an equalization payment and an asset transfer.
Am I Taxed on Asset Transfers?
Typically, cash used for equalization payments isn’t taxed during a divorce because it’s considered money on which you’ve already paid tax. Cash is king, as they say. However, when you transfer other possessions, such as a car or investments, they would normally be taxed based on the difference between their current market value and what you initially paid for them.
During a divorce asset transfer, there’s a strategic financial option available called an automatic rollover provision, which can delay taxation on the transfer. Keep in mind, this doesn’t mean you’ll never be taxed on that asset—it simply means that a transfer done as part of the separation agreement will be temporarily exempt from tax for now.
The transfer of assets is one of the biggest reasons to involve a financial professional who specializes in divorce. Consider consulting a certified divorce financial analyst to guide you through this complex process.
Am I Taxed on Support
Am I Taxed on Child Support?
Child support payments are not taxed—neither as income for the one who receives them nor as a tax deduction for the one who pays them. However, this doesn’t mean there aren’t savvy financial strategies that can be explored for your specific situation.
Involving a Certified Divorce Financial Analyst (CDFA) in your case means they can help identify any deductions or tax credits related to Special and Extraordinary Child Care expenses.
Am I Taxed on Spousal Support?
Yes, spousal support comes with tax implications for everyone involved. There’s also a lot of flexibility to create savvy financial solutions. Options include periodic spousal support payments (monthly), a lump sum payment, or even arrangements that fall somewhere in between.
Periodic (i.e., monthly) payments are taxed as additional income for the recipient and are a tax deduction for the payer. Consider this: depending on how much you pay or receive, you might be bumped into a different tax bracket.
On the other hand, lump sum payments are neither taxable nor deductible, but only if the support payments are made according to a properly prepared separation agreement. Again, this highlights the importance of consulting a Certified Divorce Financial Analyst who can help you maximize and take advantage of the tax implications of support payments.
Lastly, beyond taxes, remember that the amount of support paid or received can significantly impact a person’s ability to qualify for a mortgage. For more information, please see Gail’s Guide to Spousal Support.
Is Divorce Taxed?
When you divorce, there are real consequences attached to the transfer of assets between you and your Ex.
NEVER FORGET that not all assets are created equally, and you need to be aware of how Canada Revenue Agency (“CRA”) treats each of them if you want the most financially savvy separation agreement:
Do I have to pay Land Transfer Tax?
Land transfer tax is payable on every single transfer of land in Ontario, with very limited exceptions.
Fortunately, one of those exceptions is the transfer of the home between former spouses. This exception only exists when the transfer is done according to a properly prepared Separation Agreement.
If for no reason have your separation agreement done properly to avoid the land transfer tax.
Don’t forget to designate your new home as your principal residence, as both spouses can now have a principal resident since they are two distinct family units.
What Do I Need To Know About Divorce and Taxes?
Avoid costly mistakes—know your rights and responsibilities in Ontario. Move forward with a solid plan! Answer a few quick questions and instantly receive your FREE Ontario Divorce Plan specific to your situation. Start now and take control of your future!
Will I be TAXED on RRSPs?
You want to be really careful as to how and when you transfer any RRSP’s.
RRSP's can be transferred from one spouse to the other without any tax consequences, again as long as they are transferred as part of a properly prepared separation agreement and they stay with the recipient.
To avoid being nailed with taxes, don’t forget to sign and file the required T2220 form with CRA along with a copy of your written Separation Agreement.
How Will Marital Status Affect My Taxes?
If your marital status changes, it’s important to inform the Canada Revenue Agency (CRA), as this may impact the way your divorce and taxes are handled. For example, an update in your marital status could affect the amount of Canada Child Benefit (CCB) and/or GST/HST credit to which you are entitled.
If you’re registered with CRA’s “My Account” service, you can view the marital information they have on file for you and update your information online. If you’re not registered online, you can inform CRA of your new status and the date of the change by sending a letter or by completing form RC65, Marital Status Change.
How is the Canada Child Benefit (CCB) Dealt with in a Divorce?
If you or your new spouse or common-law partner have children residing with you, CRA will typically assign the CCB to the female parent’s account.
If you are married to or living common-law with a person of the same sex, one of you will receive the CCB for all the children. To continue receiving the CCB, both you and your spouse or common-law partner must file a tax return every year, even if you have no income to report.
How is the GST/HST Credit Dealt with in Divorce?
If you didn’t apply for the GST/HST credit on your tax return and your status has changed to separated, widowed, or divorced, you can apply now by writing a letter to your tax centre. Once your request is reviewed, CRA will send you a GST/HST credit notice advising you of the amount you’re eligible to receive.
The Unofficial Rules of Divorce:
Divorce gets prickly, even in the most amicable situation
It’s often less about the legalities and more about the money
People make expensive mistakes because they don’t make a plan
Before you do anything, understand your rights, obligations & complexities
Working Income Tax Benefit (WITB) Advance Payments
If your marital status has changed, you will need to file a new Working Income Tax Benefit (WITB) Advance Payment application. If you do not submit a new WITB Advance Payment application, your WITB advance payments will be stopped until a new application is received. The application deadline is August 31.
CRA Direct Deposit After Divorce
If you receive your CRA benefits by Direct Deposit, be sure to inform CRA if your banking information needs to be updated. This will help prevent benefits from being deposited into the wrong bank account. If you’re not already on Direct Deposit, you may want to consider registering.
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