A separation or divorce can have a significant impact on the income tax you must pay. Here are 6 ways by which you can reduce the income tax you must pay due to divorce.
1. Have a written separation agreement or divorce court order.
You can reduce the burden of spousal support by deducting your payments from your income. However, you are only allowed to deduct spousal support payments if you have a written separation agreement or court order requiring you to pay spousal support. If you simply voluntarily pay spousal support, you cannot deduct your payments.
2. Pay spousal support periodically.
A lot of people prefer simply to have a clean break from their spouse and pay all the spousal support at once. This is not a good idea from a tax point of view. A lump sum payment of spousal support is not tax deductible. However, if you pay the spousal support regularly and continually over time, you can deduct the payments from your income.
3. Your divorce legal fees may be tax deductible.
Generally, your divorce legal fees are not tax deductible. However, in the following cases, legal fees are tax deductible:
- Where legal fees are incurred to enforce spousal or child support where the right to support has already been established
- Where legal fees are incurred to obtain or vary an order for spousal or child support under the Family Law Act.
- Where legal fees are incurred to obtain or vary an order for child support under the Divorce Act. Be sure to speak with your lawyer about this and ask for the necessary documentation.
4. Divorce RRSP Rollover.
If you have to make an equalisation payment to your spouse and have an RRSP, you can transfer your RRSP to your spouse and there will be no tax consequences. Remember that both parties must sign and file Revenue Canada’s Form T2220 within 30 days of transferring the funds along with a copy of your separation agreement or court order.
5. Transfer of the matrimonial home.
Inevitably, when your marriage ends, the matrimonial home will need to be sold or transferred. When you do this, make sure that your matrimonial home’s status as a principal residence is preserved, otherwise you’l be liable to pay capital gains tax.
6. Equivalent to spouse credit. If you are separated or divorced and receive child support, you are entitled to claim the equivalent to spouse credit on your tax return.
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