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Tax aspects of divorce and separation

Legal vs. CRA definitions and approach

Marriage is a voluntary, legal and binding contract between two people of opposite or same sex who are eligible to enter into this union. Spouses are either of a man or woman who are legally married to each other.

While the definition of spouses has been slightly broadened by some of the provincial legislations, mainly for the purpose of spousal support, Canada Revenue Agency has not followed those changes and “spouse” applies only to a person to whom one is legally married.

Common Law status takes effect when partners of same or opposite sex, who are eligible to marry, but who have not done so, have lived together for a certain period of time in a marriage-like relationship. CRA requires that at least one of the following situations applies. He or she:

a) has been living with you in a conjugal relationship for at least 12 continuous months;

b) is the parent of your child by birth or adoption; or

c) has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support.

Divorce is a legal proceeding by which a marriage is legally terminated. Common-in-law couples do not require a divorce to end their relationship. A separation occurs when one spouse acts on his or her intention to live “separate and apart”.

While law recognizes that breakdown of marriage or separation may occur while spouses or partners are still sharing the same address, for Canada Revenue Agency the words “separate and apart” are the key. A legal divorce or separation agreements will not be acknowledged if couple continues to live together. Further, separation can be claimed if the couple is living separately because of a breakdown of relationship for 90 days and has not reconciled.

Hence if taxpayers who have been divorced or separated file their tax returns, which indicate that they may continue sharing same household, they can expect a letter with a long list of questions. Both separated parties will be asked to proof of living separately and apart. They will both have to provide documents showing separate addresses.

Many tax issues are affected by having (or not) a spousal or common-in-law relationship, the most common being:

-          Spousal credits and transfers

-          Child tax benefit

-          Goods and Services Tax Credit

-          Dependant tax credit

-          Medical expenses credit

CRA wants to be notified of any change in marital status as soon as possible but not before the expiration of the 90 days period in case of a separation. This can be done online, by filling out and mailing of form RC65 (Marital Status Change).

Spousal support is a taxable event. This means that the party who receives it must declare it as income and pay tax, and the party who pays it can deduct it from his or her income when filing income tax returns. Whatever spousal support arrangement is decided on must be set out in a formal separation agreement, or incorporated into a court order, because CRA is not going to take the parties’ word for it.

Child support payments are not taxable to the recipient and not deductible to the payer. The exceptions are court orders made before April 30, 1997 and still in force, which still fall under the old rules.