Tax Issues on Separation And Divorce Part 3

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 3

How are child support payments determined?The amount of a child support payment is determined by agreement of the parties or by a court, as the case may be. Part and parcel of the new child support system, however, are guidelines published under the federal Divorce Act as to appropriate
amounts of child support in various circumstances. The federal government has no authority to impose these guidelines, since separation and divorce settlements are governed by provincial law interpreted and applied by  provincial courts. However, most provinces either adopt or recommend to their courts either the federal scale or a similar one of their own devising. Even in these circumstances, the guidelines may not be binding, especially where amicable agreements are made outside the ambit of court review. Determination of these amounts is beyond the scope of this article, which is merely concerned with the taxability/deductibility of amounts determined. The federal Department of Justice publishes the federal child support amount guidelines. Call 1-888-373-2222 for more information. It is also available on the Department of Justice Canada Web site, located at www.justice.gc.ca.

Taxation of third-party payments

The general rule is that for an amount to qualify as a support amount it must be paid directly to the recipient, and the recipient must have control over how the funds are spent. However, following a separation, it often happens that the person who was, during the marriage,  responsible for the payment of certain expenditures, such as property taxes on the family home, will continue to pay those amounts directly to a third party. Such amounts can be treated for tax purposes as support amounts; however, it’s important to structure such payments carefully, as seemingly insignificant differences in the way the payments are made can have unintended and unwelcome tax consequences. The general rule in this area is that payments made directly to third parties may be deducted by the payor and included in the income of the recipient where the following criteria are met:

• the payments are made, under an order or agreement, for the benefit and maintenance of the recipient spouse;

• the payments are made at a time when the payor and the recipient were living separate and apart; and

• the court order or written agreement specifies that the recipient will include the amounts in income and that the payor can deduct them. 

For example, where a former spouse continues to make property tax or insurance premium payments on the family home in which his former spouse and their children continue to live, he would be able to deduct such payments from income, and his former spouse would include them in her income, assuming that the three criteria listed above are satisfied.

Division of property on marriage breakdown

Our tax system generally imposes tax consequences where property is transferred between persons related to one another (referred to in tax terminology as non-arm’s length parties) for any amount other than the fair market value of that property. However, different rules apply where property transfers take place as a result of marriage breakdown. Generally, there are no immediate tax consequences where property is transferred from one spouse to another, as long as the parties are separated as a result of the breakdown of their marriage and the transfer is in settlement of property rights arising out of that marriage. 

RRSP and pension assets

Most taxpayers are aware that where monies are taken out of a registered retirement savings  plan (RRSP) or a registered retirement income fund (RRIF), tax must be paid on those withdrawals. However, our tax system provides for an exception to this rule in the case of a marriage breakdown. Where former spouses are no longer living together, and there is either a court order or a written separation agreement outlining the division of property between them, amounts in an RRSP or an RRIF may be transferred directly from one spouse’s plan to the other’s in accordance with that order or agreement, without any tax consequences. Similarly, when a couple divorces, the question of entitlement to credits accrued under the Canada Pension Plan by both spouses during the marriage often arises. Here again, the law allows for the
splitting of CPP benefits between a taxpayer and a former spouse. Formerly legally married spouses (as well as common-law spouses who have lived togetherfor at least one year) can take an application to have the credits earned by both spouses during the marriage totaled and split equally between the parties.