Tax Consequences of Divorced Couples
About the Author: Wilson Wong PC, are Chartered Accountants in Calgary providing tax and accounting services to small and medium sized businesses and high networth individuals.
Divorce is a terrible situation to be in and often there is confusion on what to do with your taxes. You need to get a good accountant if you to proper advice but here are some common areas to know about.
The biggest aspect is kids. If you have children together one of you will take custody. The parent who takes custody will take a lot of the tax credits by default. In particular:
1) Amount for eligible dependant (equivalent to spouse) - this credit allows you to claim your child who is under 18 in the same way you can claim a spouse who doesn't work. Whoever has custody of the child gets this credit. If you share custody, and there are 2 children, then actually each parent may claim 1 child.
2) Amount for Children $2K - this one is claimed by the parent who claims the equivalent to spouse, they are tied together.
3) Children's fitness and arts amounts - these are not tied to custody, it is generally tied to who ever pays for it (more on this later).
4) Childcare expenses - if you've read this article Married Couples Tax Considerations - then you know that the higher income spouse receives the expenses as a deduction. In a divorce situation it becomes more complicated. Usually it's the parent who pays for the expenses, but I'll have more on this topic later.
5) Medical expenses - again it's usually the parent who paid for the expenses.
Now comes the complicated part, divorce is usually ugly and by default it is a breakdown of a relationship and will be complicated. With respect to ALL of the above tax credits, CRA has the right to revoke all of the above credits for BOTH parents if you cannot agree to who takes which credit. Yes, you may have paid for the Childcare expenses, but if the other parent doesn't agree to allow you to take this credit, then neither of you will get it. Same with the eligible dependant, if you can't agree to who claims which child, or worse you have 1 child and only 1 parent will claim this amount then CRA will revoke it for both parents. Very common scenario we see is both parents sit down once a year during tax time to talk about which credit they are each claiming and they agree to it via handshake.
Another big element of divorce is of course the divorce or separation agreement. Dictating what financial arrangements are to be commenced upon this marital breakdown. We don't usually see the above tax credits discussed in the agreement, but maybe this is something you can talk to your lawyer about, I don't think it is something put in writing.
If in your agreement you are paying for spousal support, these payments can be deducted from the paying spouse's income, and are also added to the receiving spouse's income.
Important note, if you have it in your agreement for child support payments, first of all these payments are not deductible, and second of all the equivalent to spouse credit becomes off the table. If you have a formal agreement to make support payments, then this credit is unavailable. If this is an important aspect for you then do remember to keep child support off the table in your agreement.
In our practice we often help individuals in this situation, we often recommend for us to talk to the ex-spouse to discuss which credits to share. We even perform a tax calculation of equalizing the tax credits between the 2 individuals. No matter what you do, I recommend you seek a professional accountant.
-Wilson Wong, Chartered Accountant