Divorce and Taxes – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Divorce or separation is one of the most emotionally and financially complex events a person can experience. Beyond legal proceedings and family restructuring, the tax consequences of divorce can significantly affect each spouse’s financial future. Improper tax planning during separation can lead to unexpected tax bills, lost benefits, penalties, and long-term financial disadvantages. This guide explains the tax rules surrounding spousal support, child support, custody arrangements, asset division, tax credits, and home sales—so you can make informed decisions and avoid costly mistakes.

Legal and Regulatory Framework

Tax rules for divorce and separation are governed by the Income Tax Act, provincial family law statutes, and CRA administrative policies. Tax treatment depends on whether payments are made under a written agreement or court order, the type of support (spousal vs child), and custody arrangements. CRA also has rules for claiming tax credits, principal residence exemptions, childcare deductions, and eligible dependent credits after separation. Proper documentation is essential to avoid reassessment.

Key Court Decisions

In Surrogatum Principle cases (Tsiaprailis v. Canada), the Supreme Court confirmed that tax treatment depends on the nature of payments—not the label. In Hamelin v. Canada, CRA denied spousal support deductions because payments were not made under a written agreement. In Poirier v. Canada, improper reporting of shared custody benefits led to CRA reassessment. These cases highlight the importance of formal agreements and accurate reporting.

Spousal Support vs Child Support

Spousal Support

Taxable to the recipient and deductible to the payer only if paid under a written agreement or court order and made regularly (periodic payments). Lump-sum spousal support is usually not deductible.

Child Support

Since 1997, child support payments are not deductible by the payer and not taxable to the recipient. These payments do not affect the payer’s tax return.

Custody Arrangements and Tax Credits

Eligible Dependant (Equivalent-to-Spouse) Credit

In shared custody, only one parent may claim this credit per child per year. CRA often requests proof of custody schedules.

Canada Child Benefit (CCB)

In shared custody (50/50), CRA splits CCB payments. If custody is not equal, the parent with primary care receives 100% of the CCB.

Medical Expenses and Tuition Credits

Either parent may claim these credits for a child—but only one parent can claim each expense in a given year.

Home Sale and Principal Residence Exemption

If the family home is sold during separation or divorce, the principal residence exemption (PRE) typically applies, eliminating capital gains tax. However, if a spouse keeps the home and later sells it, the PRE rules become more complex. Valuations, ownership percentages, and use of the home must be documented to avoid future tax issues.

Division of Assets

Dividing assets (RRSPs, pensions, investments, real estate) does not automatically trigger tax, if transferred under a written separation agreement. RRSPs can be transferred tax-free between spouses but must be properly documented to avoid income inclusion.

Support of Adult Children

Support paid for adult children (e.g., university students) may have different tax implications. Payments must be reviewed case-by-case under CRA guidelines.

Legal Fees and Tax Deductions

Legal fees may be deductible if incurred to: enforce spousal support, collect late support, or seek an increase in support. Legal fees related to child custody or property division are not deductible.

Special Tax Considerations

• Childcare deductions must be claimed by the parent with the lower income, even after separation.

• Dependency credits may change based on custody arrangements.

• Benefits such as GST/HST credits, provincial benefits, and disability tax credits must be reviewed after separation.

• Income splitting opportunities may disappear after divorce.

• Joint debts and CRA balances must be clearly assigned.

Why Documentation Matters

CRA often audits separated parents due to conflicting claims for dependants, childcare expenses, and CCB eligibility. Written agreements, court orders, proof of custody schedules, and clear payment records reduce disputes and reassessments.

Mackisen Strategy

At Mackisen CPA Montreal, we guide clients through the tax complexities of separation and divorce. We review support agreements, optimize tax credits, prepare RRSP transfer schedules, structure spousal support payments for maximum benefit, assist with principal residence reporting, analyze pension and asset division, and correct previous-year filings. Our tax planning ensures financial clarity during a difficult transition.

Real Client Experience

A Montreal parent avoided $8,000 in reassessments after we corrected CCB and dependent credit claims. A client reducing spousal support achieved major tax savings with our restructuring advice. A divorcing couple avoided RRSP tax penalties by using a formal transfer agreement. A separated parent facing CRA audit passed successfully after we documented shared custody and support payments.

Common Questions

Is spousal support taxable? Yes, if periodic and under a written agreement. Is child support taxable? No. Who gets the CCB in shared custody? CRA splits it 50/50. Can RRSPs be transferred tax-free? Yes—with proper legal documentation.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal ensures separated and divorced clients receive accurate tax guidance, maximum deductions, and full CRA compliance. We help protect your financial future during one of life’s most challenging transitions.