Tax Considerations: Benefits and Credits in Separation Agreements

May 22, 2018

In addition to the “usual suspects” of custody, access, child support, spousal support and equalization of property, there are other important issues to consider including within a Separation Agreement.

One such issue involves the tax considerations of available deductions, benefits, and credits, as well as the tax implications relating to RRSP’s and RESP’s.

Spousal support and third party payments (for example , mortgage payments), are deductible from a payor’s income and included within a recipient’s income, as long as these payments are made pursuant to a written Agreement or court order. It is therefore essential that a Separation Agreement reflect the spousal support arrangements and, if a third party payment is being made, the Agreement must reflect that the third party payment is also deductible and includible.

Clients will often ask whether they are to file their tax returns as “separated” if they continue to live separate and apart under the same roof. Importantly, even if family law may recognize a spouse to be separated if he or she is still living under the same roof, Canada Revenue Agency (CRA) will not. If you and your spouse continue to reside in the same household and continue to share parenting and financial responsibilities, CRA will NOT consider you to have separated, for the purposes of administering the Canada Child Benefit or GST/HST credit. Furthermore, you have to be separated for 90 consecutive days before December 31, in order to have been considered separated for that year. You cannot separate on December 1, 2018, for example, and indicate on your tax return that your marital status in 2018 was “separated”.

For the Canada Child Benefit (CCB), only the primary residential parent qualifies for CCB. In cases of shared parenting (in other words, an equal sharing of time, as opposed to “joint custody”), each parent will receive 50% of what they otherwise would have received if the child was in his/her primary care. As the CCB is based on one’s income, parents in an equal time-sharing arrangement will receive different CCB amounts, unless their respective incomes are identical.

The Eligible Dependant Credit is the former “Equivalent to Married” credit. It is a credit that is available to all taxpayers who have supported a dependant during the taxation year, and it is reduced by the dependant’s own income.

Only one person in each household may make this claim, regardless of the number of dependants.

As with the CCB, the primary residential parent is the only parent who can make this claim.

However, in cases of shared parenting, the parents can alternate this credit annually (if there is only one child) or they can each claim a child if there are more than two children (and the parents are in a shared parenting arrangement for both children).

Of note is that only a child support recipient can make this claim. Therefore in a shared parenting situation, it is essential that the Separation Agreement reflect that both parents are support recipients, and that it does not specify the set-off amount of support payable. CRA is very strict about this; if an Agreement indicates that X owes Y $500 and Y owes X $300, therefore X will pay Y the set-off amount of $200, the eligible dependant credit claimed by X will be denied, even if the parties agree that this claim is to be alternated annually. Make sure you have a very carefully crafted agreement!

I want to address the issue of childcare expenses, and the tax deduction relating to this expense.

For separated parents, the primary parent is the only parent who can claim the childcare deduction for tax purposes. In a shared parenting situation, each parent may claim the childcare expenses relating to the period of time that the child resided with him/her. This is important, as parents may want to agree that the higher income parent will be able to claim all of the childcare expenses, as part of their settlement agreement. CRA will not allow this.

The transfer of Registered Retirement Savings Plans (RRSPs) often form part of the settlement of property issues between spouses.

Of significance in regards to these transfers, is that a transfer of RRSPs from one spouse to another automatically triggers tax consequences to the transferring spouse, unless the spouses execute a Form T2220, transferring the tax consequences from the spouse who is transferring the RRSPs, to the spouse who is receiving them. In such event, the spouse who receives the RRSP transfer will pay the income tax associated the RRSPs upon the redemption of the RRSPs, and not upon receipt of their transfer.

Finally, many parents will have contributed towards Registered Education Savings Plans (RESPs) for their children’s post-secondary education.

If the parents are joint subscribers to their children’s RESPs, they can remain joint subscribers after separation and divorce, and they can contribute independently.

Alternatively, after a separation they can split the RESPs into separate plans, and contribute into their own separate plans.

A final note on the RESPs; government matching grants are allocated to RESPs on a first-come, first-served basis. It is therefore important for the parties’ agreement to reflect that each party will contribute towards the RESPs in such a manner that they will each benefit from one half of the maximum allowable government grant.