Tax Headaches for Separated Couples…

Here comes tax season again, and it’s time for Jack and Jill to pay the price for being respectful and abiding Canadian citizens.  It is hard enough to disentangle income tax issues when the family unit is still whole, imagine the complications that can arise when you have just separated and you do not have a finalized separation agreement. Canada Child Tax Credits, Harmonized Sales Tax Credits, Universal Child Care Benefits, Dependants Claims and National Child Benefits are only a few of those complex issues that need to be dealt with and Jack feels overwhelmed.  To make things worst, his lack of “meaningful” communication with Jill at this stage of their separation process is actually making income tax filing a true headache.   

If you were represented by a family lawyer when you signed your final separation agreement, you should not have to worry about future tax implications as your counsel should have carefully assessed them and included specific provisions in the agreement to help you determine which tax credits and benefits each of you is entitled to claim. However if, like Jack, you do not have such an agreement, here are a few tax principles that you absolutely need to be aware of:

 

 

1-     Child support payments. These payments are not tax-deductible for the support payor and are not included in the recipient’s income for tax purposes.  Support Payors Beware: You cannot claim an income tax deduction for the child support payments you made this past year.

  

2-    Spousal support payments. These payments, however, are included in the income of the support recipient and are deductible from the support payor’s income (unless the support was paid in one lump sum in which case different rules apply).  However, to be deductible the obligation to pay spousal support must be confirmed in a written separation agreement or a court order.  While Revenue Canada will recognize support payments made in the year preceding the execution of a separation agreement in most circumstances, you do not want to take a chance and you should confirm any spousal support obligations in a binding agreement (even partial, even signed at the kitchen table) without delay. Spousal Support Recipients Beware: You may need to pay income tax on the money you have received from your ex this past year, so make sure you put some money aside.  For more information on this topic you can visit the following Canada Revenue Agency link:

     

      http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/spprtpymnts/menu-eng.html.

3-    Shared custody arrangement. A shared custody arrangement (for tax purposes) means that each parent spends an equal amount of time (or a near-equal amount of time) with the children in any given year.  In that case, the rules can get real complicated.  You can obtain more information by visiting the following link on Canada Revenue Agency’s website: http://www.cra-arc.gc.ca/bnfts/menu-eng.html.  Share Custody Parents Beware:   Do not leave your money to the Taxman! Figuring out what tax credits and benefits you are entitled to and for what period of time can be a complex task.  You should consult with an accountant who will help you breeze through that determination.

Family Law is not a “one size fits all”

Jack is leaving with peace of mind for a one week vacation with the children during the school March Break.  He is feeling much better now that he has spent an hour with a family lawyer he just retained to represent him in the context of his separation from Jill.  Speaking with friends, family members and other well-intentioned – but misinformed – people had left him completely anxious, discouraged and convinced that he would lose it all to Jill unless he hired a “big gun” lawyer, took a “go-for-the-throat” stance in his separation process and spent half of his retirement savings in legal proceedings.   The lawyer he retained was reassuring, clearly explained to him his rights – yes, men and women have equal rights – and obligations and, most importantly, explained to him that it was not necessary to create a legal war to arrive at a fair and equitable settlement, even if he and Jill did not see eye-to-eye on many things.

On top of all of that, Jack learned that when you are going through a separation, you need to be very careful about who you listen to.  During this one-hour informational meeting, Jack learned that he, just like many of his supporters, had many misconceptions about family law, separation and divorce.  Among other things, Jack learned that he was WRONG to believe that: 

1. Couples living in common-law relationships had the same rights and obligations than married couples;

2. The laws about separation and divorce are the same throughout Canada;

3.  A spouse’s extra-marital affairs and/or bad behaviour could result in a less favourable financial settlement for that spouse;

4.  If Jill remarried, his spousal support obligations would automatically stop;

5.  Having joint custody of the children would mean that neither he or Jill would have to pay child support to the other;

6.  “Joint custody” meant that the children spent one week with one parent and one week with the other;

7. Even if he and Jill had signed a marriage contract (something he had thought about asking Jill to sign when they got married), the result would be the same (i.e. that a marriage contract not worth the paper it is written on, as they are not recognized by courts when there is a separation);

8.  If Jill refuses to let him see the children as he wants, he has the right to stop paying child support;

9.  When his children are twelve years old, they can choose where they want to live;

10.  If push comes to shove, he could just take a lower-paying job and would not have to pay spousal support.

There is lot to be said about family law issues, and many people have an incredible amount of misconceptions about them. That’s why it is very important to be careful about who you listen to when you go through a separation as what applied to them may not apply to you.  Just remember that family law is not a “one size fits all” and getting clear and reliable information about YOUR family matter can avoid costly  battles as well as future headaches and heartaches.