Family Law Tax Matters Toolkit for Clients & Lawyers

 

Family Law Tax Matters Toolkit for Clients & Lawyers

by Anonymous

In Collaboration with Justice Canada, the Canada Revenue Agency and Finance Canada, the Canadian Bar Association has updated their popular Tax Matters Toolkits. These documents are useful for clients going through separation and divorce. The documents also help family law lawyers understand how tax rules might affect a client's future finances on separation or divorce. Various tax credits, benefits and deductions are described.

More specifically, here is what is covered in each Toolkit:

Tax Matters Toolkit (for clients)

http://www.cba.org/CBAMediaLibrary/cba_na/PDFs/Sections/taxMattersToolkitClients_Eng.pdf

WORKING WITH THE TAX SYSTEM

• Thinking about the tax consequences

• Asking questions

• Keeping receipts and important information

• Filing tax forms

• Getting advice

• Definitions

IMPORTANT CRA FORMS RELATED TO SEPARATION AND DIVORCE

• About a change in marital status

• About support payments

• About RRSPs, RRIFs, and SPPs

Tax Matters Toolkit (for lawyers)

http://www.cba.org/CBAMediaLibrary/cba_na/PDFs/Sections/Tax_Matters_Toolkit_Lawyers_Eng.pdf

SEPARATION AND THE CANADA REVENUE AGENCY

• Filing the T1 Annual Income Tax Return

• Notifying CRA of a change in marital status

• Documents supporting Change in Marital Status

• When are you Living apart?

• Same house/separate living quarters

• Couch surfing/no new fixed address

DEDUCTION FOR LEGAL FEES

• Legal basis for deduction of legal fees

• CRA approach

PRINCIPAL RESIDENCE" RULES

• "Principal residence" criteria

• Issues at the time of separation or divorce

SPOUSAL SUPPORT

• Characteristics of spousal support

• Spousal support is paid before there is a written agreement or court order in place

• "Specific Purpose" and Third-Party Payments

• How to notify CRA of spousal support payments

• Spousal support payers – Deductions for spousal support payments

• Spousal support recipients – Reporting spousal support payments

• Spousal support payers – reducing taxes withheld at the source

• Spousal support recipients – increasing taxes withheld at the source

• Deductions for the payer – the year of relationship breakdown

ARREARS AND LUMP-SUM PAYMENTS

• Tax impact of a lump-sum payment on the payer

• Qualifying Retroactive Lump-sum Payments (QRLSP)

• Tax impact of a QRLSP on the recipient

CHILD SUPPORT

• Tax treatment: written agreements and court orders from before May 1997

• Federal Child Support Guidelines

CHILD BENEFITS

• Canada Child Tax Benefit

• Child Disability Benefit

• Eligible dependent credit

• Child Care Expense Deduction

• Tuition, Education, and Textbook Credit

PENSIONS

• Canada Pension Plan

• CPP: credit splitting

• CPP: end of pension sharing

• Payment of taxes at source when pension plan benefits paid

REGISTERED RETIREMENT SAVINGS PLANS (RRSPS) AND REGISTERED RETIREMENT INCOME FUNDS (RRIFS).

• Transfer of RRSP or RRIF funds to a former spouse or common-law partner

APPENDIX – DRAFT TAX LETTER

 Tax Tips for Separated Families

by Jennie Weeks

Did you know that when you receive spousal support, it creates RRSP contribution room!

Yes, it's true. It’s considered ‘earned income’ and is taxable in the hands of the spouse who receives the spousal support and tax-deductible to the spouse who pays the support. 

This is especially relevant to a spouse who has no other earned income as they have no other way to create RRSP contribution room. 

If you are receiving spousal support, there is an opportunity to contribute to an RRSP to reduce your taxable income. Up to 18% of your spousal support payment can be contributed to an RRSP (to a maximum).

For example, if you are receiving $50,000 in spousal support, you can contribute $9000 to your RRSP, and you only pay income tax on $41,000 of this payment. You save for retirement and pay less tax. 

But be careful, as RRSP limits are based on the previous year’s earned income, so if it's your first year receiving spousal support, you will need to wait for the following year to make the contribution to your RRSP. 

For more information about tax planning during separation, check out the list of Certified Divorce Financial Specialists on our website.