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Posts from the ‘CRA – Income Tax’ Category

Tax Implications of Divorce for Ontario, Canada Residents

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Tax Rules Made Simple 

Most people aren’t turned on by tax law; even lawyers find the topic unduly complex and labyrinthine. But there are a few relatively-straightforward tax rules and specific principles about which separating and divorcing couples should be aware.

Legal fees that are paid to pursue child or spousal support are deductible from the recipient spouse’s income.

The concept – at least as tax principles go – it relatively straightforward. The Income Tax Act specifically allows that for the purposes of determining taxable income, a person can deduct any legal and accounting fees (which the legislation collectively calls “professional fees”) that are incurred in the pursuit of a claim for child or spousal support. The professional fees are deducted in the year in which they are paid. In this way, by deducting those professional fees from total income, the person receiving child/spousal support enjoys a reduced level of income tax liability. (Note that legal fees incurred by the paying spouse or partner are not deductible).

However, this tax rule comes with some rather finicky exceptions and clarifications. For example:

• Legal costs to quantify a spousal support entitlement, established under the Ontario Family Law Act, can be deducted from income.

• Legal costs in connection with determining child support are always deductible, whether the proceeding takes place under the Ontario Family Law Act or the Divorce Act.

• Legal costs to establish the entitlement to child or spousal support amounts under the Divorce Act are not deductible.

• In contrast, legal costs incurred to enforce a pre-existing right to either interim or permanent support are deductible.

Complicated? It can be. Always seek competent Family Law and tax advice in connection with the deduction of legal fees from income.

 

5 Things to Know About the Canada Child Tax Benefit

The April 30th filing deadline will be here soon enough, so it’s time to start thinking about individual income taxes, and all of the various components that go into providing the federal government with a financial “snapshot” for the past year.

For separated or divorcing spouses with children, one of those components is the Canada Child Tax Benefit (CCTB).

The Canada Revenue Agency (CRA) administers the CCTB, which is a monthly, tax-free benefit received on behalf of a child under the age of 18. Its purpose is to assist families with child-raising costs, and its value depends on family income, among other things. The benefit amount is either mailed out by cheque, or – if the recipient requests it – can be direct deposited to an account held with a financial institution.

For parents who are separated or divorcing, the question arises as to how the CCTB is calculated and which of the parents is entitled to receive it. Here are the most important points to know:

 

1. Eligibility is determined by the Income Tax Act.

Once a CCTB application form is filled out by one or both parents, the Act’s stipulated eligibility requirements are applied to determine which parent is entitled to the benefit. The dollar-amount of the CCTB is calculated with reference to the applicant’s income for the previous year (together with the income of any cohabiting spouse or common-law partner, if applicable).

 

2. Usually, the custodial parent receives the CCTB.

Where the child splits time between different residences, the parent with primary responsibility for his or her care receives the CCTB. The CRA will make this determination, after reviewing the circumstances and assessing which parent provides the majority of the child’s care and upbringing. To do so, the CRA will refer to a number of specific legislated factors, and will consider the provisions of any existing court order.

 

3. If custody is shared equally, then each parent may be entitled to the CCTB for 6 months of the year.

The CRA currently does not split the benefit entitlement into periods of less than half-year, no matter what the actual custody and living arrangement may be. Furthermore, for CCTB purposes, spouses are only considered separated if they have lived separate and apart for 90 days or more.

 

4. Only one parent is eligible for the CCTB in any given month.

The monthly CCTB amount cannot be shared or pro-rated between parents, no matter how the child’s actual living arrangements are structured.

 

5. Eligibility for the CCTB ends when the child turns 18.

It may also end if the custody of the child changes, or if the parents fail to meet other eligibility requirements (particularly those relating to family income).

Note that the CCTB received by an eligible parent may include an amount for the Child Disability Benefit (CDB), which is an additional monthly benefit for qualifying families of children with several and prolonged mental or physical impairment. It also incorporates the National Child Benefit Supplement (NCBS), which is the federal contribution to the National Child Benefit, a program aimed at assisting low-income families with children.

 

 

Taxation of Support Payments

  1. Support payments are amounts paid to a spouse, a former spouse or the parent of the payor’s child
  2. The Tax Rules differ between spousal support and child support
  3. Support payments are defined as payments made when parties are living apart, paid on a periodic basis and which are made for the maintenance of the recipient or for a child of the marriage
  4. All support payments which are not specifically defined as spousal support will typically be considered as child support for tax purposes
  5. If spousal and child support are payable but the full amount is not paid, any payments made will be treated first as child support and only any remaining amount will qualify as spousal support

Tax Treatment of Spousal Support

  1. Eligible Payments made in a particular calendar year will be deductible in determining the income of the payor
  2. Payments deductible by the payor will be taxable to the recipient
  3. Spousal support payments paid by an estate are not taxable to the recipient or deductible by the estate

 

When are Support Payments Deductible?

  1. The payments must be made pursuant to an order or written agreement
  2. The agreement or court order in place must refer to the amount paid as spousal support
  3. Payments must be periodic, the parties must be living apart and the payments must be for the maintenance of the recipient

Deducting Support Paid Prior to an Order or Agreement

  1. If support payments were made prior to an order or agreement being in place then they can still be deducted if made in the same year or in the year before the agreement or order was put in place
  2. Payments must be eligible as support payments
  3. Child support payments made prior to an order or agreement can be deducted as well in some circumstances
  4. The agreement or order must refer to these payments and the parties must clearly indicate that these payments are to be deductible to the payor and taxable to the recipient in the year in which they were paid
  5. Amended personal income tax returns for prior years will be necessary

 

Tax Treatment of Child Support

  1. Any monies paid as support prior to an agreement being in place or not specifically defined as spousal support will be considered Child Support
  2. Child support paid pursuant to an agreement or court order is not deductible by the payor or taxable to the recipient

 

Taxation of Lump Sum Payments

  1. A lump sum payment is a single amount of money generally paid at once or in installments over a specified period of time
  2. Lump sum payments are typically not tax deductible, but can be in certain situations

Deductible Lump Sum Payments

  1. A series of annual payments for spousal support pursuant to a court order or written agreement will be deductible
  2. Lump sum payment representing an advance of future support paid only for the purpose of secure the funds for the periodic payments will be deductible
  3. A Payment made on account of overdue periodic payments which were required pursuant to a court order or written agreement may sometimes be considered deductible

Income Averaging for Recipients of Lump Sum Arrears of Support

  1. Income averaging is available to person who have received lump sum payment representing arrears of support payments where at least $3,000 was owed which was on account of amounts owing in previous years
  2. This allows taxation to occur as if the money was received at the time when it was owed as opposed to having to pay tax on the full amount in one year

Taxation of Support Arrears

  1. Arrears payments will be deductible in determining the taxable income of the payor if they are made on account of spousal support
  2. Arrears payments which are deductible for the payor are taxable to the recipient
  3. Taking advantage of Income averaging options may be prudent when receiving a large arrears payment representing spousal support

 

Arrears Payments which may not be Deductible

  1. If a settlement is reached whereby a lump sum is paid which does not represent the total amount of outstanding payments then this amount may not be deductible
  2. Partial arrears payments made where both child support and spousal support are outstanding will not be deductible until child support amounts have been paid in full

Taxation of Third Party Payments

  1. Payments made by a 3rd party for the benefit of a spouse, former spouse or child can be deductible in determining the taxable income of the payor
  2. Payments deductible by the payor will be taxable to the recipient spouse
  3. Common third party payments include items such as tuition fees and rental payments

 

 When will Third Party Payments will be Deductible?

  1. The nature of the 3rd party payment must be specified in a court order or agreement
  2. Both parties must agree that the 3rd party payments will be deductible
  3. The court order or agreement must specifically refer to the third party payments section of the income tax act
  4. The parties involved in the divorce must be living separate and apart
  5. The payments must be made solely for the maintenance of a spouse or former spouse if they are to be made after a court order or agreement is in place
  6. The payments may have been made for a dependent child if made before a court order or agreement was in place

When will Third Party Payments not be Deductible?

  1. The payment is in relation to a residence occupied by the payor
  2. The payment is in relation to the purchase of tangible property

Transfers of Property in Divorce

  1. Property transfers between related parties are general taxable even if no money changes hands
  2. In a divorce when capital property is transferred between spouses who are married by way of a settlement of martial property rights then the transfer may not be taxable
  3. To avoid taxation both parties must be residents of Canada

 

Tax Impact of Capital Property Transfer Between Spouses

  1. In a separation property is transferred between spouses by way of a rollover
  2. A rollover can be explained as a transaction in which property is transferred to one spouse and the government pretends as if they had purchased it (or purchased it alone) at the exact same time as when it was actually purchased
  3. spousal transfers of capital property are deemed to take place at the same cost as the original purchase for tax purposes so there will be no tax impact of transferring the property at that time
  4. when and if the property is sold, any gain, loss or recapture since the original purchase will belong to the spouse who now owns the property
  5. The transferor may choose to have the property transferred instead at its fair market value if they wish to take advantage of tax planning opportunities

 

Tax Impact of Non-Capital Property Transfer Between Spouses

  1. Non-Capital property transferred between spouses is taxable
  2. If property such as business inventory is transferred, then a sale at fair market price will be deemed to have occurred and the transferor must recognize any resulting gain or loss

 

Property Transfer and the Matrimonial Home

  1. Individuals can designate one home as their principle residence
  2. The gain on any sale of the principle residence is tax free
  3. Divorcing couples should take care in any transfer of the Matrimonial home that the receiving party is able to designate it as their principle residence
  4. This is most important in situations where there are two or more principle residences

 

Property Transfer and RRSPs/RRIFs

  1. All or part of one spouse’s RRSPs may be transferred to the RRSP of a spouse or former spouse without any consequences if the following conditions are met
    1. The transfer is made directly between the parties plans by direct deposit
    2. The parties must agree to sign certain CRA forms
    3. The transfer is made when the parties are living separate and apart pursuant to a court order or separation agreement
    4. The agreement must specifically require the division of property as settlement of martial rights
  2. An RRSP may be transferred to a spouse or former spouse tax-free in consideration for a lump sum spousal support payment if the lump sum is being paid to satisfy all future claims for spousal support

Tax Deductibility of Legal Fees

  1. Legal fees are typically not deductible unless paid in relation to obtaining, enforcing or varying a court order for spousal support
  2. Legal fees paid by a support paying spouse are never deductible

 

Legal Fees Paid by a Recipient-Spouse

Legal fees are deductible by the recipient of support in the year the fees are paid in the following circumstances:

  • Fees paid to obtain an order for child or spousal support
  • Fees paid to enforce an existing order for child or spousal support
  • Fees paid to vary an existing order for child or spousal support
  • Fees paid to defend a reduction of child or spousal support

 

Costs Awards

Any legal expenses being claimed must be reduced by the amount of any costs awarded by the court which are received by the recipient spouse in the same year as the fees are paid

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit us at www.RussellAlexander.com.

More on the Ins-and-Outs of “Income”

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More on the Ins-and-Outs of “Income”

I have written previously, What Counts as “Income” for Child Support? – Top 5 Concepts , about how “income” is an important factor in determining whether and how much child support a court will order one parent to pay to the other. For these purposes, the basic rule is that “income” is simply the amount reported to the Canada Revenue Agency (CRA) for the purposes of determining the annual federal income tax owed.

However – as we have come to expect with family law – some circumstances call for exceptions or differential treatment, designed to allow courts fairly address the special-case scenarios that can arise. Most often, these flow from the unique circumstances of the paying parent’s employment arrangement, or else from special financial circumstances or events that arise from his or her particular employment scenario. For example: Self-employment income is generally the amount that a person reports to CRA as income. However, the court will look at the reasonableness of the reported amount, usually by reviewing the individual’s records and – where there is a corporation involved – by reviewing the financial statements for the previous three years. This review will involve scrutiny of all aspects of the business: the expenses paid, as well as the payment made to employees, consultants and independent contractors.

Partnership income is another type of income that involves specific treatment. A parent who is self-employed but in a partnership – and who is taking a “draw” as partnership salary – will also have to satisfy a court that the money drawn out is reasonable in all the circumstances. If it is not, then a court may impute income to the parent; as before, this usually follows upon the court taking an income “snapshot” from the past three years in order to arrive at a fair figure.

Bonuses and overtime are also subject to a court’s scrutiny; the analysis begins by applying the general rule that such payments received by a parent from his or her employer will be included as income. However, adjustments can be made for exceptional years – for example where there was an unusually high bonus in a single year. Once again, the goal to for the court to make a fair assessment of the paying parent’s overall income despite any uncommon fluctuations.

Severance packages and termination pay are generally included as income as well, but there can be exceptions – not to mention differing treatment in terms of how the received payments are to be distributed across a multi-year period where the severance/termination is designed to serve as replacement income for a longer time-span. Once again, courts will often treat these scenarios on a case-by-case basis.

Do you have questions about whether an unusual or one-time influx of money constitutes “income” for child support purposes? We can help address your concerns.

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit us at www.RussellAlexander.com.

Top Divorce Blogs of 2013

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Top 10 Familyllb’s Blogs of 2013

Well it has been another busy year for us and our bog has been honoured with a Clawbies Award as one of Canada’s top legal blogs.  Thank you to everyone for your continued comments and support.

Here are some of our Top 10 Blogs for 2013:

Number 10: Top 5 Things Self Represented Litigants should know about conducting a trial10.1

As a self-represented party, you must present your own case at trial. The purpose of this blog is to set out some practical and procedural matters with respect to the trial process in order to assist you in representing yourself.

 

Number 9: Selling the Matrimonial Home – What if One Spouse Won’t Co-operate?9 9 9

A recent decision called Ivancevic-Berisa v. Berisa shows what Ontario courts can do if one spouse refuses to co-operate in selling the matrimonial home post-separation.

 

Number 8: Husband Downgrades Job, Then Quits Altogether – But Support Stays the Same8

This was a case which shows that a voluntary change in circumstances – including a significant reduction in income – does not necessarily mean that a parent’s obligation to pay child support will be reduced correspondingly.

 

Number 7: 5 Ways to Make Sure Your Separation Agreement is Valid 7

Separation agreements can be a useful means by which separating spouses can take first steps toward unwinding their financial and family-related affairs by way of a mutual agreement. This Blog was a fan favorite in 2012 and continues to be popular as it provides a list of the top five ways to ensure that a separation agreement is valid and enforceable in Ontario.

Number 6: We’re Officially Separated – Can I Change the Locks on the House? 6

When a couple first separates under contentious circumstances, I will often get questions about what each party’s respective rights are in the early stages, i.e. before the long process has started of formally dividing up their assets and dealing with any support and child-related issues. One of the most common questions is whether the spouse who remains in the matrimonial home after separation can change the locks in order to exclude the other spouse.

Number 5: Texting and Family Law – Top 3 Things to Know5.1 bmp

Virtually everyone texts these days. In the context of Family Law disputes, it can be a useful tool for short, informative exchanges between separated spouses, for example to efficiently communicate on matters relating to the day-to-day care and custody any children they share.

But in the hands of some former couples, they can serve as a high-tech medium for thinly-veiled hostility, confrontation, acrimony and confusion.

 

Number 4: Top 5 Things to Know About the Canada Child Tax Benefit 4

This blog was also a fan favourite in 2012. Soon it will be time to start thinking about individual income taxes, and all of the various components that go into providing the federal government with a financial “snapshot” for the past year.

For separated or divorcing spouses with children, one of those components is the Canada Child Tax Benefit (CCTB).

Number 3:  What “Material Change” is Not: Some Real-Life (and Perhaps Surprising) Examples3

The concept of “material change” involves the notion that a court-imposed order requiring a parent or spouse to pay support may have been fair at the time it was handed down, but subsequently becomes unfair due to unforeseen circumstances. Where a later court finds that such “material change” has taken place, it may have the authority in the right circumstances to vary the initial order accordingly.

This determination of what constitutes “material change” is not always straightforward. Indeed, some scenarios may intuitively seem to qualify on first blush, but on closer examination turn out not to meet the legal standard at all.

Number 2: Top 5 Questions About Adultery and Divorce in Ontario2.1

Leaving aside the intriguing question of how adultery affects couples psychologically and emotionally (and why such powerful, successful people would jeopardize their marital relationships in this manner), the legal effect of adultery is quite clear.

In Ontario (as elsewhere in Canada), the laws relating to divorce based on a adultery are governed by the federal Divorce Act, which provides that a “breakdown of a marriage is established only if the spouses have lived separate and apart for at least one year or the spouse against whom the divorce proceeding is brought has committed adultery or treated the other spouse with physical or mental cruelty.” (Note that it must be the other party who commits the act: a spouse cannot apply for a divorce based on his or her own adultery).

Number 1: 10 Things You Should Know About Child Support1.11.11.1  1.1

1.2Again, this continues to be a very popular post and is evidence of the ongoing need that parents have to for information about child support.  This blog examines how all dependent children have a legal right to be financially supported by their parents. When parents live together with their children, they support the children together. Parents who do not live together often have an arrangement in which a child lives most of the time with one parent. That parent is said to have custody of the child. This arrangement can be written in a separation agreement or court order (sometimes called legal custody), or may occur without a written agreement or court order (sometimes called “de facto” custody).

Either way, the parent with custody has the main responsibility for the day-to-day care of the child and has most of the ordinary expenses of raising the child. The other parent should help with those expenses by paying money to the parent with custody. This is called child support.

There you have it.  Some of our top Blogs for 2013.  Thank you  again to everyone who have visited our Blog and all your continued comments and support and thank you for the honour of a Clawbie Award.

Two necessary evils — know your obligations re: income tax and spousal/ child support – Video

 

 

Wednesday’s Video Clip: Know your obligations re: income tax and spousal/ child support

Income tax: Not a popular concept even at the best of times. But add in the obligations, which arise in the context of paying child or spousal support, and it’s enough to cause heart palpitations in most Canadians.

This is because the Canada Revenue Agency rules relating to how support payments are to be treated are quite complex. To make things more confusing, the federal Income Tax Act has separate rules for spousal support as opposed to child support.

In this video we review some key points to keep in mind.