How does divorce affect one’s taxes?

On behalf of Kirk Montoute LLP posted in High Asset Divorce on Saturday, October 25, 2014.

A variety of financial concerns have to be taken into account when a marriage breaks down, and it may be necessary to call upon accountants, financial advisors and business valuators to provide an accurate picture of each spouse’s financial situation and how the matrimonial assets should be divided.

In addition to the fair distribution of matrimonial property, the tax implications of divorce should also be considered. Generally, separated spouses in Alberta can transfer matrimonial property to one another without paying a tax on the transfer. Such a tax-free transfer can apply to a Registered Retirement Savings Plan, a Tax-Free Savings Account and capital property owned by either spouse. However, there are tax implications regarding child support and spousal support.

Here is a quick breakdown of how taxes and deductions generally apply to support payments:

  • Is child support taxable to the recipient? No.
  • Is child support deductible by the payer? No.
  • Is spousal support taxable to the recipient? Yes.
  • Is spousal support deductible by the payer? Yes.

If the payer of spousal support falls behind, then a lump-sum payment of support in arrears is generally taxable to the recipient upon receipt. However, the recipient of payments from prior years may be able to request to have the tax applied as if the spousal support payments were received on time. This request can be made if the amount in arrears is $3,000 or more (without interest).

One of our previous posts has more Spousal Support Guidelines in Alberta.

Something else to consider, in terms of taxes, is the Universal Child Care Benefit (UCCB), which is payable to the parent who has custody of the child, or to both parents if they share custody. This benefit is taxable.

A recent article in The Globe and Mail covers a few more tax-related issues to consider if you’re ending a marriage.

For more on protecting your financial interests in asset division, please visit our Calgary property division overview.

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