Your income tax situation will be impacted threefold by the decisions made in your divorce:
Firstly, it is vital that you consider tax implications when you are weighing property settlement options. Although most assets (e.g. stocks, recreational property, etc.) can be transferred in name from one spouse to the other without triggering tax on marriage breakdown, it is the future tax liabilities of the property you retain that is essential to understand. In order to make decisions that you can feel good about, it is so important to be educated. If you retain physical property other than the matrimonial home (e.g. rental property, recreational property, etc.) and decide to sell the property down the road, you will pay a capital gains tax on half of the profit in the tax year of the sale. The same tax implication also applies to most stocks, mutual funds, and similar investments. If you keep RRSPs or other retirement assets, you will pay tax in the year that you withdraw these assets (albeit many years down the road).
Secondly, the decision surrounding spousal support may very well affect your income tax situation. If monthly spousal support is agreed upon in your divorce, then the receiving spouse must pay tax on that income, and the paying spouse will receive a tax deduction for the support paid. Lump-sum spousal support payments are not taxable or deductible.
Thirdly, and often the most ignored issue in final divorce agreements is the impact of tax credits with respect to children available to claim on an annual income tax return. Most people do not realize that divorce has a huge impact on the bottom line come “tax time.” When these issues are not agreed upon during divorce negotiations, ex-spouses are often left to work these things out on their own; or worse, no one ever informs them of these available credits, and both miss out on these valuable claims. Often, there are thousands of dollars worth of tax savings involved. Tax credits include, but are not limited to, the dependent amount, children’s fitness credit and transit credit. A tax deduction may also be available for the expense of childcare.
Before you sign your final divorce agreement, you must ensure that you understand the tax implications of all of your permanent decisions in these areas, so that you can make the best choices for your financial future!
Sharon Numerow is a Certified Divorce Financial Analyst at Alberta Divorce Finances in Calgary.