Tax Issues on Separation And Divorce Conclusion

March and April are the busiest times of the year for tax accountants. Many of the clients Thibault Jones Law works with have certain tax benefits when it comes to dealing with their family issues. It is now tax season and a great time to discuss some of the potential tax issues relevant to family law clients.


CCH - a Wolters Kluwer business is a company that focuses on research in various areas of tax, accounting, law ect. This series will break down a great article produced by CCH entitled "Tax Issues on Separation And Divorce".  Due to the length of the article, this blog will break it down into smaller parts, however, you can read the entire article on the website of CG Jones CGA or click here and scroll down to the article.

Part 4

Deductibility of legal fees

In even the most amicable of divorces, it is almost inevitable that both parties involved will incur some legal fees. Where matters become contentious, and particularly where litigation is required, the amount of such fees can be substantial. The

CRA’s current rules and administrative policies on whether such legal fees are deductible have evolved over the past several years through a series of technical opinions, court cases, and technical newsletters, making it difficult to determine what is or isn’t deductible at any given point in time. However, it is possible to outline the general rules which apply to payors and recipients of support, with the  caution that the question of deductibility should be confirmed with a professional who is familiar with both these rules and the individual’s circumstances. Generally, after October 10, 2002, legal fees paid to obtain spousal support or an increase in spousal support amounts, to make  child support nontaxable, or to collect late support payments may be deducted by the person  who paid the fees. Similarly, legal fees paid to enforce child support orders are deductible.  Finally, where a person receiving support pays legal fees to defend against an action brought to reduce those support amounts, those fees may be deducted. From the point of view of the payor of support, the CRA takes the position that legal fees paid to defend against claims for support or increased support are not deductible.

After the separation—who claims

what?

Tax deductions for children—the “equivalent to spouse” deduction

Following a divorce, a single parent who lives with and supports his or her child may claim what is known as an “amount for an eligible dependant”, or AED, sometimes referred to as the single parent exemption. The tax credit that may be obtained is a significant one, allowing the parent to reduce his or her federal taxes by about $1,100, and provincial or territorial taxes by anywhere from about $400 to $750, depending on the province of residence. The rules respecting eligibility for the credit can be confusing and sometimes even arbitrary; it is important to ensure your eligibility before making the claim and to respond promptly to any request from the tax authorities for documentation establishing your right to claim the credit. As well, different rules apply with respect to who may claim the credit in the year of separation and in subsequent years.

Year of separation

Generally, a person who pays child support is not allowed to claim an eligible dependant amount in respect of that child. However, in the year the parents separate, the parent who pays support has an option.

He or she may claim the credit (assuming that no other person is claiming the AED for that child), or may claim a  reduction for spousal support paid, assuming that all other eligibility criteria for an AED credit or a support payment deduction have been satisfied.

Years after the year of separation

In years following the year of separation (i.e., where the parties live separate and apart for the entire year), the parent with whom a child lives may claim the AED. Where an AED claim is made, especially for the first time, the tax authorities may well request some documentation to show that the person claiming the credit does actually have custody of the child. A separation agreement or court order outlining the custody and living arrangements is ideal; failing that, a copy of school records verifying that the child’s address is the same as that of the parent claiming the credit should suffice. More and more frequently, divorcing parents are able to agree on and implement joint custody arrangements, where the children may move back and forth between each parent’s home. In such situations, it’s important to remember that the AED cannot be split–it must be claimed by one parent or the other. Co-operation in this regard is essential–if

the parents cannot come to an agreement, and both attempt to claim the credit in respect of the same child, neither will be allowed to claim it and the credit will be lost. However, where there are two children in the family, and the parents share custody, it is perfectly possible for one parent to make the AED claim in respect of the first child and the other parent to make the claim for the second child.

Conclusion

Obtaining professional advice is usually a good idea when dealing with tax matters. When those tax matters involve the end of a marriage, such advice is essential. The tax rules in this area, particularly those governing the taxation of support payments are, unfortunately, among the more complex in the Income Tax Act. The rules are replete with exceptions, limitations, elections, and changes in the both the law and the administrative policies of the CRA. In addition, this is an area in which strict compliance (or lack of compliance) with the sometimes arcane and confusing rules and regulations can make all the difference. Numerous court decisions have held that, even where the parties are in agreement and their intent is clear, a failure to get the paperwork right means that the parties’ intent is thwarted, to everyone’s cost. Spending some time and money to ensure that all foreseeable financial and tax issues are thoroughly discussed and that all the formalities are complied with will minimize future conflicts and provide a reasonable degree of certainty for both parties with respect to their financial futures.