Qualifying Payments for Spousal Support during and after separation. 

by Jennie Weeks

Qualifying Payments for Spousal Support during and after separation.

For many couples’ separation is a financial wake-up call. Dividing income and assets and funding two households usually means there are fewer resources to go around. As a Financial Specialist, I try to find ways to help families retain as much of their family resources as possible. Understanding how separation changes your tax status can save you money and even impact how you divide your assets.

Here is one helpful tip especially for a family with a large income differential between two spouses. Spousal support is an income-splitting tool and creates an opportunity to increase a family’s overall after-tax cash flow. This is less relevant for a family where two working spouses have similar incomes.

Spousal support is usually tax-deductible to the payor and taxable to the receiver of the support. However, if the payor wants to claim this deduction, there are a few additional rules. For example, you need to have a signed written agreement or court order; it must be paid on a periodic basis, not as a lump sum; it must be actually paid in the current year or the year prior for the CRA to award this tax status to the payments. Sometimes a year or more can go by without having this valuable income-splitting tool, and a family may miss out on this tax savings. The sooner you have an agreement, the sooner your spousal support payments can reduce your family’s overall tax burden.

This insight is particularly important for the interim time period when a family is in the process of separating but has not finalized their agreement.

There is often a period of time when one spouse is providing support to another spouse but it has yet to be defined by law. This is usually a kitchen table discussion between spouses as they try to figure out how to separate their finances and one spouse has moved to a new residence. Even after a more formal process is chosen like collaborative divorce, it can still be many months before an interim agreement or separation agreement is signed that lays out the child and/or spousal support obligations.

There is a possibility to make some of these payments tax deductible after the fact. There are a few ways to prepare this but what’s most important is that you consider engaging a financial specialist early on with tax experience and retain the proof of payments.

For more information about the tax treatment of spousal support, please reach out to a financial specialist from our team at Collaborative Divorce Vancouver.

For more information about spousal support entitlement and payments or assistance with the drafting of an agreement respecting spousal support, please reach out to a lawyer from our team at Collaborative Divorce Vancouver.

 

Tax Tips

by Michelle Kooy and Jennie Weeks

The unravelling of a relationship often requires the assistance of a legal professional. As tax season approaches, you may want to consider if some of the legal fees you have paid to date are eligible to be deducted from your income. Where a recipient spouse has a right to receive support payments from the other spouse, there are some limited circumstances in which some of the recipient’s legal fees paid may be deductible. Unfortunately, the same is to not true for a payor spouse or for other general legal fees paid to obtain a divorce.

If you think that you may be eligible to seek a deduction for your legal fees, it is recommended that you seek advice from a tax professional.

Be sure to let your tax preparer know that you have separated and reach out to your lawyer to see which of the billings can be deducted. Your lawyer can often prepare a separate invoice for the time charged for legal representation for support payments.

More information is available on the government of Canada’s website: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/it99r5-consolid/it99r5-consolid-e.pdf.

 

The Canada Child Benefit (CCB) and Separation

by Graham Laschuk

Most people know about the Canada Child Benefit (CCB). It is a monthly, tax-free payment made to low or middle income families with children under 18. The amounts are not small – for example, if family income is about $33,000, you can get the maximum CCB of nearly $7000 per year for each child under 6 and about $6000 for each child 6-17 years of age. Naturally, as family income increases, the amount of CCB decreases. The payments go to the person who is “primarily” in charge of the care and upbringing of the child.

When parents are together, the tax legislation assumes the mother is the caregiver, and the CCB payments go to her. However, for separating or divorcing parents, it can be more complicated. Where one parent has the vast majority of caregiving responsibility for the child, that is a simple scenario. That parent is entitled to the full CCB.

However, cases of “shared parenting” result in each parent getting 50% of the CCB. The Canada Revenue Agency (CRA) considers “shared parenting” to be when a child lives with two different parents in separate homes on a more or less equal basis. Parents in this situation are both required to apply for the benefits. The CRA will decide if your situation involves shared parenting. Sometimes, evidence is needed to prove what the facts are, beyond a court order or separation agreement. There is uncertainty about how to count the time – whether it be in minutes, hours, days, overnights, or some other measure. And does time in school count? The tax legislation does not provide clear answers.

Be aware that the CRA will sometimes audit a parent for CCB payments improperly received. This might happen, for example, if the parent leads the CRA to believe they are the main caregiver of a child but it turns out the other parent has the child far more than 50% of the time. The CRA may try to recover the over-payment from the misrepresenting parent. Understandably, it may be hard to find the thousands of dollars to repay the CRA. So it is best to avoid problems by setting up your arrangements correctly at the start of any new parenting regime.

The best approach is to (1) tell the CRA of any changes to your parenting regime within 90 days of the change, (2) keep good records and supporting documents to prove your time with the child, and (3) contact a legal professional for advice.

You can also click on this CRA link for more information: Canada child benefit (CCB) - Canada.ca

 

Money is Not a Numbers Game

by Tracy Themes

As a financial advisor with a background in psychology, I can tell you with confidence that money is not about the numbers.

If wealth was about numbers, our richest citizens would be accountants and math professors. And though a few of them are billionaires, they would certainly not be the major players on Forbes annual list.

I have spent my career studying the question, ”Why are some people rich and some people poor?”. And this quest continues to both inspire and perplex me. And even at this stage of my professional journey, I am more confident of my ability to say what money is not.

First of all, money is not real. It is a representation. Not to get too esoteric, but money in and of itself has no intrinsic value. A carrot has intrinsic value. A goat in Peru as well as a chef in Paris can recognize that a carrot is to be eaten. However, if you drop a loonie in a kitchen with that same chef or the field where the goat is now happily crunching away, they would both be flummoxed. Money has to be assigned its meaning. And that meaning is highly dependent on the personal, environmental and cultural context it is placed in. If you were to drop $20 at the corner of Main and Hastings in Vancouver or at the bar of the members-only Terminal Club, the currency would be equally understood but the perceived value of that $20 would be potentially very different.

When there is conflict about finances it must be recognized that the conflict is about what the money represents. And determining this value system can be tricky. People often say that they value money for one reason but have unconscious needs or beliefs operating below the level of their awareness. This is also why discussions about money are often laden with strong emotion and stress.

I facilitate these discussions on a daily basis. At Sophia Financial, where I work, our philosophy is that, “we believe that people should boss money around and not vice versa”. But that is an ambitious objective. Because we must delve and dive patiently, tenaciously until we discover what money really means to each person, couple or family. At its very core, money is a form of energy, or in blunt terms, power. Whoever has the money has the power. It buys our survival and can protect us from our deepest fears. We all have a history with money and a current belief system about it. As does our culture. We may say it does not matter but the world will quickly disavow us of that notion. Just try paying a mortgage or feeding your family without it.

So, whether we are professionals in the domain of money management or we are in the throes of a negotiation about it, we must be very respectful of the shapeshifting nature of money and the people discussing it. When people are angry and tearful they are most likely not talking about the numbers on their pension form or the cost of tuition, they are associating these numbers with deeply held beliefs and strongly anchored feelings. Acknowledging this complexity will go a long way to successfully negotiating healthy, positive agreements.