As we have reached the end of April, we would typically turn our minds to tax filings. But since the Canada Revenue Agency (CRA) has given us a bit of a reprieve from filing our tax returns by April 30 this year (given that it has been a different year, indeed), I thought it would be timely to discuss how tax issues and family law issues often intersect.
As an initial disclaimer, this blog will not be a comprehensive assessment of all of the possible points of intersection between tax law and family law. As well, I am not an accountant, and so I cannot and will not give tax advice. Instead, I wish to highlight three commons tax considerations when dealing with the family law client:
- Child and Spousal Support
- Child Tax Benefit
- Spousal Rollovers
Child and Spousal Support
Up until April 30, 1997, both child support and spousal support payments made on a monthly basis were subject income tax consideration, with the payor allowed a deduction for the amount paid, and the recipient would have to claim the support received for income tax purposes.
Since May 1, 1997, child support payments no longer have such tax considerations.
However, monthly spousal support payments continue to attract the tax consequences referred to above. So a $500.00 per month spousal award is not necessarily $6,000.00 paid by the payor or $6,000.00 received by the recipient, given that the tax considerations noted above. As such, when advising a client about the spousal support that they are going to pay or they can expect to receive, one must understand the “after-tax” value of the spousal support award. As an aside, the courts will usually decide upon the amount of spousal support to be paid/received in accordance with the Spousal Support Advisory Guidelines, which make such calculations less of an “art” and more of a “science” than in years gone by.
There is an exception, though. In some cases, the parties may agree that if spousal support is made in a “lump sum payment” (as opposed to monthly periodic payments), then there is no tax consideration.
To determine if your spousal support payment is, or is not, taxable, please consult with a family law lawyer, an accountant, or please see the information as provided on the CRA’s website.
Child Tax Benefit
Properly referred to as the Canada Child Benefit (CCB), it is a tax-free monthly payment made to eligible families to help with the cost of raising children under 18 years of age. I have highlighted the important part of that sentence – it is tax free! There are, however, a few questions that a client needs to ask their lawyer about this benefit.
First of all, who is eligible for it? Per the CRA guidelines, it is the person who is “primarily responsible” for the care and upbringing of the child or children. What does “primarily responsible” mean? It is loosely defined as the person who is responsible for things such as:
- supervising the child’s daily activities and needs
- making sure the child’s medical needs are met
- arranging for childcare when necessary
If a parent has sole custody or has joint custody, but with a primary residence, that parent is primarily responsible. If the parties share custody, the tax benefit can be divided, although the amount each party gets may be different (see below).
Next, how much of a benefit can a recipient expect to get? This will depend upon their “adjusted family net income.” The CRA has a “CCB calculator” on its website, to help parties determine if they are financially eligible and the likely monthly amount they can expect to receive.
If you need any more information on this issue, please refer to the CRA’s website.
Spousal Rollover
When parties separate and/or divorce, one of the issues that are often resolved is the transfer of title of the capital property (the home, the cottage) or other property (RRSPSs, RRIFs) from one spouse to the other.
Generally, when a party transfers real estate to another person, they would have to pay a capital gains tax, because there has been a deemed disposition (the transfer of title) of the property. The same is true with non-capital property, i.e. when a person cashes in their RRSPs, there is a deemed disposition, and a certain amount of the RRSP’s value is withheld by the financial institution that holds the RRSP and remits it to CRA for tax purposes.
However, the CRA has provided special rules to avoid such taxation when it happens between former spouses. To be eligible for this legal tax avoidance:
- the parties must be separated;
- there must be a brief agreement (signed by both former spouses), or a court order, with specific wording in the agreement or court order as set out by the CRA; and,
- the parties must complete the necessary CRA spousal rollover form.
Once again, if you would like more information on this topic, please consult with a family law lawyer, an accountant, or please see the information as provided on the CRA’s website.