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Divorce and Taxes in Ontario
Must be aware of the Tax Implications
When residing in Ontario, divorcing couples must be aware of the tax implications that are typically associated with the divorce process. During a divorce, both spouses will experience a significant change in their tax situations that will last until after a divorce is finalized.
The Canada Revenue Agency (CRA) considers a couple separated strictly for tax purposes, once a married or common-law couple has lived separately and apart for more than 90 consecutive days. If a couple does not live apart for 90 days or more, the CRA does not consider the couple separated for the primary purpose of taxes for Child and Family Benefits. Although it is legally possible to be separated while living within the same household as an ex-spouse, the CRA will not recognize the separation until the specific standards have been met. It is crucial to keep note of the specific date that marks 90 days of living apart, as this date will be significant for current and future tax purposes. It is important to remember that this requirement differs from the Family Law Act; as couples are not required to live in separate locations to be considered a ‘separating’ or ‘separated’ couple. Evidently, the CRA possesses different qualifications and classification standards regarding divorce and taxes, as opposed to the legal system in Ontario. Some spouses may be exempt from this specific requirement if there is a clear, self-contained separate living quarters for both spouses within the same household. Although, if two spouses live within the same home and continue to share responsibilities, such as parenting and finances, the CRA will not consider the couple to be separated. In fulfilling or not fulfilling this requirement, individuals will notice tax implications regarding Canada Child Tax Benefit, Goods and Services Tax (GST), and Harmonized Sales Tax (HST).
When a couple decides to divorce, they must agree upon a division of assets, which primarily includes; real estate, savings accounts, financial investments, pension plans, and the matrimonial home. Once agreements are decided upon and listed within a proper Separation Agreement, one or both spouses will have to transfer their assets to equalize and fulfill the agreed upon terms. This process is referred to as an equalization payment and an asset transfer. Usually, cash being transferred for equalization payments during a divorce will not be taxed, as it is considered to be money that has already been taxed by the government. However, possessions transferred from one spouse to another, such as a vehicle or investment, will indefinitely be taxed. Typically, these possessions will be taxed at the financial difference between the current market value and the initially paid value. However, a spouse conducting an asset transfer can use a strategic financial option available, which will allow individuals to use an automatic rollover provision. This financial option will delay any further taxation on the transfer being made. Despite this financial option, individuals must acknowledge the future tax implications that are associated with it, as it is a temporary alternative. With all of this being said, it is wise to obtain a Certified Divorce Financial Analyst (CDFA) to help support the divorce process, especially when dealing with the transfer of assets.
During and following the divorce process, all child support payments will not be taxed on; however, spousal support payments are associated with additional tax implications. Typically, child support payments will not be taxed as a source of income for the spouse receiving the payments. In addition to this, child support payments are not tax deductible for the spouse who provides the ongoing payments. However, this financial reality is subject to diverse circumstances. Again, it is always beneficial to obtain a Certified Divorce Financial Analyst (CDFA) during the divorce process. The professional skills and expertise that a CDFA can bring to the table can enable spouses to locate and receive tax deductions and credits related to Special and Extraordinary Child Care expenses. In contrast to this, spousal support payments involve additional tax implications for both parties involved. The standard amount spouses will be taxed are subject to a variety of options available. For example, spouses can decide upon two common options including, monthly periodic spousal support payments and a lump-sum payment. Typically, the periodic payments are taxed as an additional source of income for the support recipient and as a tax deduction for the support payor. Therefore, depending on the support amounts, both spouses can be moved into a different tax bracket. In contrast to the periodic payment option, lump-sum payments are not taxable or deductible if the support payments are made according to a proper and legal Separation Agreement. A CDFA will be able to further explain and support divorcing couples in maximizing the tax implications of any necessary support payments. A CDFA will also assist spouses in understanding how to prevent any future challenges in qualifying for a mortgage, in relation to the amount of support being paid or received.
A common question asked during a divorce includes, “Will I be taxed on RRSP’s?” There is no simple answer to the question, as it is dependent on individual situations. Spouses must be extremely careful how and when they decide to transfer any RRSP’s. Typically, individuals will not get heavily taxed on the transfer of an RRSP, if a properly prepared Separation Agreement has been developed and finalized. RRSP’s can be transferred from one party to another without serious tax implications, although the Separation Agreement must be legal, binding, and enforceable. In addition to this requirement, individuals must sign and file a T2220 form to the Canada Revenue Agency (CRA) and provide a copy of a completed Separation Agreement.
Keep in mind that if your marital status changes, you must inform the Canada Revenue Agency (CRA), to ensure any divorce and tax implications are correctly handled. More specifically, changing your marital status can affect the amount of UCCB (Universal Child Care Benefit) and/or GST/HST credit you are entitled to. This alteration in status can be adjusted through the CRA’s online services, as long as you have a registered ‘My Account’ profile. However, if you are not registered with the CRA’s online services, you can simply complete and submit a form called RC65, the Marital Status Change. In relation to this, if a marital status has changed, individuals must file an application for a new Working Income Tax Benefit (WITB) Advance Payment. It is imperative to complete and submit this application, as a failure to do so will result in a halt of your WITB advance payments until a new application is received and reviewed.
In Canada, if a married or common-law couple have children to consider and support, there is a benefit called, Universal Child Care Benefit (UDDB), available for financial support. In the case of a divorce or separation, the CRA will transfer a child or children under the female parent’s account. If a couple is of the same-sex, then the CRA will decide which parent receives the UCCB for each child in the family. When receiving the UCCB, spouses must file a tax return for this financial support each year, before, during and after a divorce or separation.
Another common question asked by divorcing couples includes, “How is the GST/HST credit dealt with during a Divorce?” If a spouse does not apply for the GST/HST credit on their tax return, but is now separated, divorced, or widowed, they must apply for this by writing a formal letter to their legal tax centre. Upon reviewing the request, the government will send a GST/HST credit notice notifying the individual of an updated amount of their GST/HST credit entitlement.
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Pension Valuation in Ontario
Are pensions included in a divorce?
A commonly question asked by individuals going through a divorce reads, “Are pensions included in a divorce?” The simple answer to this question is, yes. In Ontario, every financial asset and possession that holds increased value throughout a marriage is evenly divided when going through a divorce; therefore, all pensions must be included within a Separation Agreement. The laws of Ontario make it clear that both spouses are automatically entitled to a portion of the others individual pension.
A private work pension plan does not solely belong to an individual spouse within a marriage; rather it is measured as a matrimonial asset. A pension valuation will be an aspect covered within the divorce negotiations, to ensure a fair and balanced distribution listed on a Separation Agreement. In relation to the distribution of funds, it is extremely important to know the difference between a ‘Pension Statement’ and a ‘Pension Valuation’. Individuals cannot assume the value of their pension based on their pension statement, as they do not reflect the same amounts. Typically, an annual pension statement does not include the pension valuation as a financial asset to benefit the purposes of the family law. On average, the financial differences between a pension statement and a pension valuation vary between $50,000 and $200,000. With this being said, individuals should not make a final decision about pensions, prior to receiving professional financial support and Independent Legal Advice (ILA). In Ontario, specific government regulations will enable divorcing couples to apply for an immediate transfer of a financial lump-sum from a private pension plan, if they meet the appropriate criteria. In order to be eligible and accepted for this transfer, couples must meet the following conditions:
- The couple must be currently separated with no foreseeable chance of reconciliation
- The pension has not already been paid out
- The couple has successfully obtained an official family law value of the pension plan by the plan administrator
- The appropriate division of the pension is clearly included within their Separation Agreement
- The couple must provide an exact amount of transfer desired
Typically, pension plans are the greatest financial asset to be negotiated during a divorce. If couples possess a Canada Pension Plan (CPP) they can apply to the government to evenly divide their CPP contributions, throughout the time they have mutually lived together. This official process is considered as credit-splitting. Couples are able to apply for credit-splitting if they have lived together for a minimum of one year during their marriage, and have been living apart for a minimum of one year. Although, credit-splitting is not a quick and easy process; spouses are required to notify the government, and then complete and submit the necessary forms prior to being accepted. Note that CPP credits can be evenly distributed even if only one spouse has been contributing to their CPP. Therefore, both spouses are not necessarily required to possess their own CPP account to be provided with a portion of their spouses during a divorce.
There are clear differences between a defined contribution and a defined benefit pension, which can cause some confusion for individuals going through a divorce. A defined contribution plan is a retirement plan that is regularly funded by the employee, employer, or both, which is invested in for the individual employee. Once the employee decides to retire, they receive the total accumulated financial contributions earned. In comparison to this, a defined benefit pension is when an employer guarantees the individual employee a specified amount once they have officially retired. The total amount provided is usually dependent on the employee’s income level, years of service, and age; as opposed to being primarily dependent on investment returns upon retirement. Within a defined benefit pension, the family value is defined as the total contributions made between the marriage date and the date of separation. Evidently, couples should obtain the assistance of a financial professional to help determine the exact amount each spouse is entitled to, the increased value of the asset, and how to evenly distribute the total value. As previously stated, individuals are unable to correctly value their pensions independently. It is extremely challenging to determine an updated value of a pension, between the date of marriage and separation. A financial professional and plan administrator must be contacted to properly value a pension for family law reasons. During the negotiations, both spouses will agree upon a separation date, enabling professionals to effectively calculate a pension value and include it within a legal, binding, and enforceable Separation Agreement.
When residing in Canada, there are various options for couples who decide to split a portion of their pensions. Typically, the options provided to divorcing couples include; moving funds from one pension account to another with the approval by the pension administrator, transferring the pension value to a secured retirement account, or simply leaving the pension plan for their future benefit. In some cases where the pension is already being received by a retired spouse, the other spouse can apply for an immediate transfer with the government. In this case, a lump-sum will be received by the spouse who is not yet retired. Although, the negotiations of these terms will involve tax implications and ramifications for their future retirement plan.
Regardless of the divorce process taken, divorcing couples will be made aware and assisted with their entitlement to a possible portion of their ex-spouses pension. The professionals will determine an exact amount that you may be entitled to, along with how to best distribute any existing pension amounts. It is important to note that not all pensions are necessarily split evenly. The equal division of assets is primarily based on the value of the pension. Therefore, it is possible for one spouse to keep their entire pension, while the other receives an appropriate value determined by professionals. In order to ensure the future income and financial status for both spouses upon retirement, it is essential to obtain assistance from a financial advisor or a Certified Divorce Financial Analyst during the divorce negotiations. In doing so, divorcing couples can ensure that both parties equally benefit from the financial agreements decided upon, and are stable within their financial positions moving forward.
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Division of matrimonial property
Matrimonial property refers to the assets and debts that were acquired during an individual’s marriage, to which should be divided equally amongst spouses. The division of matrimonial property is set out in the Net Family Property Statement, a document the mediators uses to show the individuals what it looks like for them to leave the marriage with the exact same amount on money excluding any excluded property. The division of matrimonial property is an important part of the separation and divorce process so it is important to seek advice on the topic from a professional. The division of matrimonial property can be extremely challenging for some couples to agree upon; therefore, couples can allow the court to decide upon these terms for you. If a couple decides to let the court divide their matrimonial property and assets, they must claim this within six years of being legally separated or within two years of a divorce being finalized. According to the law within Ontario, everything must be divided equally, regardless of who paid for it in the past or whose name is legally listed. There are professionals and online resources that can assist couples in calculating the equalization of assets and properties during a divorce, which will support spouses in determining how to equally divide their property and assets and record it on their finalized Separation Agreement.