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Separation - Positive and negative tax consequences
From tax expert Gerry Vittoratos
April 12, 2018
In this installment, we will see all the tax implications we need to consider when a separation happens between a married or common-law couple.
When is there a separation?
A separation becomes official when you have been living separate or apart due to a breakdown of the relationship for a period of at least 90 days and you have not reconciled. Once the 90-day period has been crossed, the effective date of separation is the first day you started living separate and apart. For a married couple, this event only causes a separation; they are not considered divorced unless they have gone through the process of a divorce settlement.
What if the couple reconciles?
For common-law couples that have no children, once the separation becomes official (crossed the 90-day threshold), the couple must stay together for a new 12-month period (definition of common-law spouse), starting from the date the conjugal relationship resumed, to be reconciled from an income tax viewpoint. This rule can have several important tax consequences which will be discussed below.
For married couples, if they are not divorced, and for common-law couples having children, the date of reconciliation is the day the conjugal relationship resumed. For these couples, no accumulation time is needed to be reconciled.
Tax consequences of a separation
In the year of separation, there is a choice to be made between these amounts:
- Claim spousal amount for the ex-spouse based on their income up until the date of separation (Schedule 1 line 303) [ITA 118(1)a)]
- Claim taxable alimony payments made to the ex-spouse (T1 line 220) [ITA 60]
- Claim the eligible dependant amount (if applicable) (Schedule 1 line 305)[ ITA 118(1)b)]
For both the spousal and eligible dependant amounts, you only need to meet the requirements for these credits “at any time in the year” [ITA 118(1)a) & b)]. Therefore, in the year of separation, or the year of reconciliation, either credit can be claimed.
Either spouse or common-law partner (but not both) may claim a spouse or common-law partner tax credit in respect of the other, provided the spouse or common-law partner making the claim supported the other (Folio S1-F4-C1, paragraph 1.30). This mention in the folio is important; what it tells us is that, for example, a couple that separates January 3rd cannot make mutual claims of each other, even though this would be theoretically possible because only their incomes before the separation would be considered.
Eligible Dependant Amount
In the year of separation, the same choice of credits for the spousal amount applies for the eligible dependant amount (see above). Just like the spousal amount, you only need to meet the requirements for this credit “at any time in the year” [ITA 118(1)b)] to be eligible. Therefore, in the year of separation, or the year of reconciliation, you can claim this credit based on the income of the dependant for the whole year.
Only one person can claim the eligible dependant amount in a situation of a joint custody. If the ex-spouses cannot come to a consensus, then neither will be able to claim this amount (see Farahvash decision in Tax Court). In the situation of a joint custody with multiple eligible children, the ex-spouses can each claim one child (TI #2010-0368381E5). In the years following the separation, no claim for eligible dependant can be made in respect of a child for whom child support payments are made [ITA 118(5)].
Canada Child Benefit (CCB)
In the case of a separation when the couple is eligible for the Canada Child Benefit, if there is one supporting parent only, the CCB will be recalculated based on individual income (stripped of the ex-spouse’s income) as of the month following the official separation month. For this recalculation to apply, the RC65 form has to be filed within 11 months of the separation month.
In the situation of split custody, the monthly benefit is based on the parent’s income, without consideration for the ex-spouse’s income. Once the benefit is determined, it gets cut in half.
Child Care Expense Deduction
In the year of separation with no reconciliation within 60 days after the end of the tax year, child care expenses will be allowed only to the individual who resided with the eligible child and only to the extent that the expenses were paid by that individual (paragraph 1.33 of folio S1-F3-C1).
In a shared custody arrangement, each parent may only claim child care expenses incurred for a period during the year that the eligible child resided with the parent and only to the extent that the expenses were paid by that parent (paragraph 1.34 of folio S1-F3-C1). In the situation of one spouse reimbursing the other for these expenses, the parent getting reimbursed for a portion of the expenses should emit a receipt to the other parent (paragraph 1.35 of folio S1-F3-C1). The reimbursed parent can claim the net amount as a child care expense (paragraph 1.35 of folio S1-F3-C1).
Disability Tax Credit Transfer
The spouse that would be considered the supporting individual can claim this transfer. By rule, the parent who is claiming the eligible dependant amount [ITA 118(1)b)] for this child is considered the only supporting person for the purposes of this transfer [ITA 118.3(2)a)(i)(A)]. However, in cases where both spouses are remarried and neither can claim the eligible dependant amount, a person is generally considered to be dependent on someone if the individual has actually supplied necessary maintenance, or the basic necessities of life (food, shelter and clothing) on a regular and consistent basis. [paragraph 2.31 of folio S1-F1-C2 & ITA 118.3(2)a)(ii)(B)].
The child can choose which parent they can transfer their excess tuition credit through the T2202A. The amount of the transfer cannot be split amongst the ex-spouses [ITA 118.81].
Medical expenses can be claimed on behalf of an ex-spouse in the year of separation if the couple were together at the time the expense was incurred [paragraph 1.10 of folio S1-F1-C1]. This rule also applies for dependants [paragraph 1.10 of folio S1-F1-C1].
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