Filing taxes is complicated and time-consuming enough for a single person with one salaried job. The act of getting a second job or getting married can complicate tax forms further. It's not surprising you feel overwhelmed about filing taxes when separated in Canada.
In this stressful time, the last thing you need is to be more stressed over tax forms. To help you get on your feet with a solid understanding of your new tax situation, we have compiled a comprehensive guide below.
Read this article to get a handle on your unique situation and learn about any refundable tax credits of which you can take advantage.
Filing Taxes When Separated in Canada - How Does it Work?
How do you file taxes if you are separated in Canada? Tax forms are typically convoluted and hard to follow, but there a few simple rules to understand that will help you make sense of the process.
The most important first step is to notify the Canada Revenue Agency (CRA) of the change in your marital status. This rule goes for any change, not just a separation. If you have just gotten married, entered common law, gotten a divorce, become widowed, or have separated for more than 90 days, you need to notify the CRA by the end of the next month.
If you are not yet separated for 90 days, the CRA will not recognize your separation. You need to wait to change your marital status until after 90 days. Only after that period will you be able to tell the CRA the original date of the separation.
You can notify the CRA of this change by phone, mail, or online when you sign in to your account. They will use this information to recalculate your benefits. Your new status will go into effect next month.
If you have had a marital change after December 31st, you will still need to file your past year's taxes as the original status you were for that year. Your new status will not go into effect until the next tax year.
Be careful, though. If you are still sharing parenting and financial responsibilities in the same household, this could disqualify you from separation status and the tax credits and benefits that come with it.
Proving Your Change in Marital Status to the CRA
The CRA will ask for documentation that proves your change in marital status regardless of what change you are claiming. If you are recently separated, you will want to be able to prove that you were once living with your partner, and now you are not.
A good example of proof of separation is providing a rental agreement that has both you and your partner's names listed prior to the separation. You would complement this document with another rental agreement showing that you now live on your own.
Make sure that you provide documents that support the date of your separation. If you cannot provide one of these documents, the CRA will accept letters from two different parties who can sign a document promising honesty about the marital situation they personally have observed.
Remember, you still are legally required to file taxes with your spouse until you finalize your divorce.
What If We Are Separated and Not Living Together?
Your intention may be divorce, but if you have not finalized a divorce, you are still legally married. Even if you aren't living together anymore, you will have to navigate this new tax situation together.
Remember, the CRA will only recognize your separation after 90 days of living in different households and filing your new marital status with them.
Even though it is technically legally possible in Canada to still live together during a separation, the CRA will not recognize your separation for tax purposes. You should not attempt to file as separated unless you are officially living in different households.
You also should remember to document any division of assets properly in the event of a separation and divorce. This is especially important in the case of disagreements. There are taxes on most asset transfers during this period, and it's best to get a financial professional involved to help you.
What If We Are Separated But Living in the Same House?
Filing taxes when separate but married is already tricky, but what if you're still living in the same house? Being legally separated means you and your spouse are living separated and apart, but the CRA sees it differently.
Unfortunately, the CRA won't recognize a separation if you are still living in the same house in most circumstances. Even though you may be legally separated, this rule is especially true if there are children involved.
There are very specific circumstances in which the CRA will still recognize a separation, but they will require valid documentation. For example, if you live in a house where living quarters are strictly separated, you could try to file as separated. These living quarters will have to be self-contained and easily divided, as well as documented.
Even in the circumstance of separate living quarters, you aren't legally separated if you also share financial responsibilities or parenting responsibilities in that household.
If you would like to make the case of separation while living in the same household, you should draw up a separation agreement and set rules for living together.
This agreement needs to set clear rules and decisions for separating your finances, debts, and assets. It should set household rules for disengaging any contact with each other, including separate meal times and sleeping in separate quarters. It should also clearly state that you signed the agreement with the intention of divorce.
Who Claims the Child on Taxes After Separation?
Filing taxes after divorce with a child can certainly complicate a separation even further. There are many different agreed-upon situations that a mediator or court will allow for child responsibility. The way you file your taxes will depend on the custody agreements and living situation.
If you are not yet divorced but your CRA marital status is separated, there are complications with children involved. If your separation has allowed for an agreement of child responsibility, you should document this in your separation agreement clearly.
When filing taxes when you are separated, it is possible for both parents to claim child tax credits depending on the situation.
Child Support Payments
Child support is not considered taxable income. Neither the payer nor the receiver will have to pay taxes on this support. There is, however, a rule to claiming dependents based on who is paying child support.
There is a tax credit called an "amount for an eligible dependent" credit that helps in certain situations. If only one party is paying child support, the person who pays will not be able to claim that child on their taxes as an eligible dependent. Only the person who receives child support will be able to claim that child.
If you have joint custody, both parties can claim the child on their taxes as an eligible dependent. This credit only applies to one eligible child annually per tax filer.
If there was a change in custody during the year for which you are filing taxes, both parties will have to agree on who can claim the child as a dependent. Without an agreement, neither party can claim the child.
In general, taxes paid regarding child responsibility will be settled in a separation agreement and should be followed.
Child Care Expenses
Child care expenses follow a similar rule to child support payments. It is common for the party with the lower income to claim child care expenses on their taxes and are only valid if those expenses were due to necessity for work and school.
The parent living with the child, however, can claim child care expenses regardless of the level of income. If there is joint custody where the child lives with both parents throughout the year separately, both parents can claim child care expenses for those periods.
What Refundable Tax Credits Do I Need to Know About?
Taxes after a divorce or separation are largely dependent on your new income. It is important to file your new marital status as soon as possible so that the CRA can recalculate your tax responsibility and any benefits for which you may qualify. While separation and divorce are almost never light matters, there are some benefits that Canada offers you.
Here are some tax tips for separated couples in Canada:
The amount of taxes you pay every year depends on your household income. When you separate and divorce your spouse, their income is removed from your income. As long as your income stays the same, you will end up paying fewer taxes.
There are some ways to even further lower the amount of taxes you pay, including contributing to retirement plans and tax-free savings accounts.
You may also become eligible for tax credits like Canada Child Benefit (CCB) or the Goods and Services Tax/Harmonized Sales Tax (GST/HST). Both of these tax credits can help single parents and low-income families offset the costs of raising children.
CCB is generally given to the parent who lives with the child, but if a separation has an agreement of joint custody, the separated parents can divide the CCB.
More recently, there are refundable tax credits that help offset the cost of carbon usage taxes that are imposed in some provinces. This tax credit is called the Climate Action Incentive.
The best way to know if you qualify for child tax credits is to speak with a professional.
What About Spousal Support?
When you get divorced, it's possible that your agreement will include spousal support. This kind of support comes in the form of a lump sum at the finalization of your divorce from one spouse to another. It is also possible that your separation agreement, without divorce, could include spousal support if you wish.
Determining alimony is done according to the income levels and living situation of the two parties. The amount of alimony will be decided according to income disparity, earning potential, marital roles, attempts to become self-sufficient, and other unique factors like health conditions and disabilities.
In order to receive spousal support, one party will have to prove their entitlement to the payments. This entitlement can be due to a previous contract, one spouse's lack of career and education due to a marital role, or a severe economic hardship due to the separation.
Is Spousal Support Taxable?
This lump sum is not taxable to the recipient, but there are some situations under which it will become taxable. They are also not deductible to the person paying it, but this can change as well.
Some reasons why the spousal support payment could become taxed and counted as a deductible is if:
Both parties are living separately and apart unless a child is involved
The specified amounts are being paid regularly to be used for specific purposes
The recipient is left free reign to use the payments as they wish
The amount has been ordered by the court, written agreement, or tribunal under provincial laws
It's important to be prepared for the taxes you will have to pay on spousal support at the end of the year. You may also want to consider filing quarterly if your owed taxes exceed $3,000.
Are Legal Fees for Separation and Divorce Tax Deductible?
Generally, legal fees for separation and divorce are not tax-deductible. These legal fees are incurred due to a voluntary decision to go to court and change your marital status and set a separation agreement. There are some circumstances, however, in which you can claim your legal fees as deductions.
One major situation in which you can claim tax deductions is if you have been brought back to court to resettle the separation agreement. If your spouse is not following court-ordered payments, for example, the legal fees paid for fighting to enforce these payments are tax-deductible. Legal fees paid to fight against a reduction of support payments are also tax-deductible.
Life After Separation
Now that you know about how the CRA functions and which tax credits are available, filing taxes when separated in Canada isn't so scary. Make sure to always seek a professional if you are unsure about your situation or need more clarification on specific laws.
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