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Tax Tips for Couples Getting Divorced in Canada
Many Canadians know or have experienced at some point in time a divorce or separation that has affected them in some shape or form. When a couple decides to divorce or separate, it is a difficult enough decision without considering the tax implications. If you’re facing a divorce or separation, these tips will help you handle the situation as best you can, without negatively impacting your future finances.
Tips to Avoid Negative Effects of Divorce or Separation on Your Taxes
- Be conscious of the after-tax cost of assets that are being divided. When a divorce or separation occurs, often the most important thing to the couple is the division of their assets. It’s important to remember however, that some assets are taxable while others are tax-free. If this is taken into consideration, one part of the couple could end up missing out on a significant portion of their divided assets. Think in terms of RRSPs and non-registered investments (subject to capital gains tax if sold) versus sale proceeds from homes and properties (subject to principal home exemption if sold). Remember, it is a good idea when facing a divorce to use the rule in the income tax act that allows for you to transfer your RRSPs to a spouse upon divorce (if you need to make an equalization payment) rather than cashing them in, which would make them part of your income and subject to taxes.
- Update your relationship's status with the Canadian Revenue Agency. If you’re single, in most cases you’re entitled to a larger Canada Child Tax Benefit, than if you’re in a relationship since the amount you receive is based on your combined income (family income).
- Claim multiple principal residence exemptions. If you and your spouse happen to own multiple properties (a house and a vacation home for example) it can be a good idea to each take one property so that you can claim separate principal residence exemptions, one for each property which allows you to receive property sale’s proceeds tax-free.
- Some of your divorce-related legal fees are tax-deductible. Unfortunately, lawyer fees associated with the preparation of your separation agreement are not tax-deductible. However, if you require a lawyer’s services to collect your support payments from your ex-spouse, these are tax-deductible on your personal income tax return.
Getting Divorced or Separated? Hire a Vancouver Accounting and Bookkeeping Services Firm
Getting divorced or separated is a hard enough time without worrying whether or not you’re doing the right thing in terms of your taxes. Dealing with the tax implications of your divorce doesn’t have to be painful. If you’re facing a divorce or separation, our experienced Vancouver accountants can walk you through the tax implications of your divorce or separation and can help you make the right personal financial choices.Contact Acton’s professional accounting services today!
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