How Does A Divorce Affect Your Tax Return in Canada?
Once you are separated or divorced, how you file your taxes will change. Here’s an overview of what’s different and what you need to do.
Divorce can profoundly change anyone’s life. Regardless of how long you have been in a marriage when it ends, your tax situation changes. You don’t just break it off easily with the Canada Revenue Agency.
There is still a fair share of federal income tax you still need to watch out for even when you terminate your marriage. Still, the process is challenging with tons of paperwork gathering financial information, dealing with co-parenting, and confusing rules about your children. In general, divorce brings chaos to your life.
Whenever it comes to tax, there are critical things you need to consider after divorce. Here’s how a divorce affects your tax return in Canada.
Does CRA consider you separated or not?
CRA has to know if you are completely separated, which means you are living apart. This ensures that no one takes advantage of deductions based on their marital status. Therefore, the CRA will require proof of separation, like living apart for not less than 90 days. When you live apart and still share parenting and financial obligations, they may not recognize the separation if there are children involved and for the sake of family benefits.
Confirm your separation to the CRA
After calling it quits with your partner, ensure you notify the CRA about the new situation. You will file your subsequent returns as “separated” allowing the CRA to assess your tax in the year as “divorced” Also, CRA may notify you of the changes on your returns after, because sometimes it does not change much. It would be best to inform the CRA by the end of the month following the one when you decide to get a divorce and finalize things in recent separations.
Claim children as eligible dependents
You can claim the eligible dependent tax credit when you have children. If they are in your primary custody, then credit goes to you. For shared custody, you have to decide which parent will claim the credit. It is also possible to share claims where a partner takes responsibility in one year, then another in the following year. Incomes that the child will earn are eligible for deduction from the credit dollar-to-dollar.
Support payments and taxes
Generally, there is no tax on child support in the hands of those who receive it. Also, the person who pays it cannot claim it as a deduction. However, spousal support is fully taxable, just like ordinary income. You can claim it as a deduction and use it during filing whenever you are applying spousal support to an ex.
Divorce is a difficult time in anyone’s life. It is the best time to consult a professional to help you review the whole tax situation.
If you’re looking for an experienced accounting partner who will help take your business to the next level, contact us for more information. Visit our blog for more articles, news and updates about small business accounting, tax planning, CRA audits and bookkeeping.
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