Accountant Gila Ossip shares the most important tax tips for Canadian parents who are going through separation or divorce.
When I was going through my divorce settlement, a good friend gave me some great advice. She told me to “make sure that everything you can possibly plan for is included in your agreement and think towards the future as much as possible.”
“I am telling you this because if it is not in the agreement it will become a bone of contention,” she went on to say. My ex-husband and I co-parent very amicably, however financial issues are still difficult to navigate. But I can honestly say that my friend was was completely right, and that this was the best advice I received at the time. If only someone had written it down for me in bold!
It might be the little things like who going pays for kids’ haircuts. But it also means covering off the much bigger issues such as who is going to fund the children’s RESPs. When you are going through a separation or divorce, working through the financial issues with your ex-spouse early on will save some unnecessary stress and minimize potential complications.
Here are five important taxes issues to consider as you draw up your agreement:
Child support versus spousal support
Child support is not taxable to the person receiving the support, whereas spousal support is taxable to the person on the receiving end. On the flipside, spousal support is tax deductible to the person who is giving the support whereas, child-support is not tax deductible for this person.
If you are the one who will be receiving versus giving child support, it is in your best interest to ensure that the bulk of the money is categorized as child support over spousal support. A good guideline to remember is that a dollar of child support is therefore worth at least 30 per cent more to you than a dollar of spousal support. The only exception to this is if spousal support is given as one lump sum at the time of separating. If this is the case, it is not taxable to the person receiving the support. Spousal support law can be complicated, so be sure to find a spousal support lawyer in order to help you understand how spousal support works.
RESP(Registered Education Savings Plan) Funding
RESPs, if managed correctly, will fund your children’s entire post-secondary education. Families going through divorce tend to overlook funding the RESP because frankly, money is generally a lot tighter once there are two homes. It’s easy to forget about this while trying to deal with more immediate issues, like figuring out where everyone is going to live. Still, it’s crucial to ensure that that financial agreement specifies how the RESP is going to be funded, whether it be through 50/50 contributions from both of you, or something different.
You will also want to discuss how you will hold each other accountable towards the agreements you have for education savings. For example, in my case, we both receive the bank statements for our children’s RESP (to ensure we’ve both been making those contributions) and decisions regarding investments need to be agreed upon by both of us.
Childcare costs and paperwork
In your financial agreement you need to ensure that childcare costs are addressed in extensive detail. If you employ a nanny, part-time or full-time, to take care of your children, you need to ensure that the total cost including the Canada Revenue Agency (CRA) remittances and workplace safety contributions (note: this goes by various names province to province) remittances are also mentioned in your agreement. I always suggest to clients that they include in their settlement agreements provisions for how the paperwork and tax filings will be handled.
When lives get busy it is easy to forget that these important remittances and deadlines for filing need to be made, so it is a very good idea to hire a third-party to ensure that nothing falls through the cracks. At my company, Tax4Nanny, we have several divorced clients who share the cost of their nanny with their ex-spouses in one way or another. In these cases, we set up both individuals as an employer for tax purposes so that child care can be claimed by each ex-spouse. We also ensure that the tax remittances are considered for the nannies’ total income versus from just one of the (now two) employers. At year-end, the nanny will receive two T4s (one from each employer) and childcare expenses can easily be claimed in proportion to payments made.
Claiming dependents for tax purposes and other tax credits for children
On your personal tax return, if you are single, you can claim your child as an “equivalent to spouse” and be eligible for a larger tax credit than if you were married and both spouses were earning income. You may also be eligible for other tax incentives that relate to children who are income-dependent. The details around this could be a full article in and of itself so it’s not possible to go into all of them here, but do remember one simple thing: In your agreement, it’s an advantage to have the youngest child (or children) as your dependents. Why? Because as kids get older, the tax benefits you receive disappear and having the youngest child (or children) on your tax forms means more years of benefits. In the give and take of an amicable separation process, this may be something for which you make a concession elsewhere.
Principal residence exemption for multiple properties
If your family is fortunate enough to own multiple properties—a home and a cottage or chalet, for example— prior to divorce, it is very important to talk about and include in the settlement agreement how the principal residence exemption will be handled in the eventual sale of these properties. The reason this is so important is because profits on properties that are not your principal residence are subject to capital gains tax. Again, this could be its own article based on all the details involved, but it is an important point to raise here. If you do own multiple properties, it is strongly recommended that you mention to your lawyer that you want to get some separate professional accounting advice in this area, from which you can draw the details to be included in the financial agreement.
There are so many big and small details that need to be addressed in your financial agreement. Even the best lawyer can miss some of these issues, so by educating yourself, and in some cases also consulting with a chartered professional accountant, you can ensure they are included.
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