Separation and Divorce Have Tax Consequences

Mid life crisis?  According to Statistics Canada, there are about 71,000 divorces in Canada each year. In fact, over 40% of marriages will end up in divorce, and it can be very expensive - before and after tax!

What’s interesting too is that this statistic does not include the breakdown of other long-term relationships such as common-law partnerships.  While there are all kinds of reasons for separation and divorce, including communications breakdowns and financial issues, few take into account the tax consequences.

In fact, financial problems can be exasperated when there is trouble with the taxman; and there often is, unfortunately, because people who separate don’t understand the rules for reporting income, assets and expenses. Further, it’s not uncommon for a disgruntle spouse to leak information to the taxman about unreported income or other tax abuses by the former spouse.

It therefore pays for each spouse to get their Tax and Retirement Services Specialists involved early.

One reason is that when a couple separates, each person will be taxed as an individual and income and assets will be separated. In general, assets can be divided on a tax-free basis. Spousal support received is taxable (and deductible by the payor), but child support is not.  Each ex-spouse will want to be sure every financial consequence is equalized - after tax.

As an example, after-tax cash flow planning is important.  The spouse receiving taxable alimony may have to pay quarterly tax instalment; the other spouse will get a deduction.  After tax, each individual will want to have an equal opportunity to contribute to their own post-separation savings, including RRSP and TFSA investments.

A couple need not be legally or formally separated for their tax status to change; rather, the individuals are considered separated if they stop living together for a period of at least 90 days and do not reconcile within 90 days of the end of the year.

It’s therefore important to seek the advice of a tax professional to ensure full after-tax equality when a couple separates.  Tax and financial advisors can shore up their skills by enrolling in the certificate courses of the Knowledge Bureau by June 15. 

Call 1-866-953-4769 for more information or visit www.knowledgebureau.com/index.php/programs-courses/courses

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