Tax Implications of Divorce and Separation in Toronto

We understand that the process of a divorce or separation is generally an emotional and stressful time in your life.   However, there are some important tax planning considerations when going through this difficult process.

Splitting Family Assets

When it comes down to splitting the family assets you need to consider the tax implications of each asset class as follows: RRSP investments, your home and/or cottage, non-registered investments, and other personal assets.  Your goal is to maximize your after tax share of the assets. 

RRSPs: Make sure you do NOT cash out to make equalization payments

If you have to make a payment to your spouse as part of the equalization law, you will NOT want to sell your RRSPs in order to make this payment because this will result in selling the investments and withdrawing the funds from your RRSP accounts which become taxable at this point.

Instead, there is a specific tax rule in the income tax act that allows you to transfer the RRSPs via a spousal roll-over to avoid taxes.  We suggest that if required you use this strategy as part of the equalization payment.

Principle Residence on Family Real Estate

If the family own's more than one property such as a family home and a cottage, it is wise to transfer one property to each spouse, since in the future both of you can now claim the principle residence exemption on the future sale of the each property ( this results in a reduction of the capital gain determined for tax purposes)

Child Care Dependent Tax Credit

Update the CRA with your new martial status to either divorced or separated. This is important if you have children, since the one of the spouses can claim the child dependent tax credit, and since the other spouse's income is not factored into the calculation now, it is likely that the tax credit will increase.  It is important to understand which spouse will be claiming this credit as only one can claim this credit.

If you have any more questions or would like to speak with an MP Group advisor please call 416-214-0527 or visit www.mpgroupcpa.com

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