Tax Season! Important Tips for Divorcing Families!
1. The “Principle Residence Exemption”
In the past, so long as the entire sale proceeds of a taxpayer’s family home were sheltered by the “principal residence exemption”, Canada Revenue Agency (“CRA”) accepted that the sale did not have to be reported on their tax return. However, on October 3rd, 2016, Finance Minister Morneau put an end to ignoring the practice of reporting the sale. From now on starting with any homes sold from January 1st, 2017 onward, the sale must be reported on the seller’s tax return for the year of the sale, even if the entire gain is fully protected by the “principal residence exemption”.
The rules are complex and if you neglect to report a sale, you may end up owing a hefty penalty. If you are separated or going through a divorce, and one party fails to claim the sale of the home, who is going to pay the possible penalty down the road? If you are going through a separation or divorce, make sure your spouse is also aware of the potential penalty and request that your lawyer address this issue in your Divorce Agreement.
2. Fitness & Arts Credit
With the enhancement of the child benefits in July of 2016, Trudeau’s government is phasing these credits out entirely, effective June 2016. This means only activities paid for before June 2016 will be eligible for this credit on the 2016 and it will no longer by available on the 2017 return and forward.
3. Canada Child Benefits
Effective July 1st, 2016, both the income levels to qualify for and the benefit amounts are much higher than they were previously, which is great news for divorcing families. However, contrary to popular belief, it is not the case that after they separate couples can choose which parent will receive the government benefits. Rather, eligibility is determined by CRA, based on income (“family” income, where more than one adult in a relationship lives in the home) and on the parenting arrangement. In a nutshell, a parent who qualifies based on income will receive the full qualified benefit if they are the primary parent and will receive 50% of the benefit if they are in a shared parenting arrangement. It is also important to note that at present Canada Child Benefits are included as income for the recipient in calculations using the Spousal Support Advisory Guidelines.
4. Amount for an Eligible Dependent
A recent Tax Court of Canada case Harder v. The Queen set out that Agreements and court orders must lay out that each parent is paying the other parent monthly child support if the children are in a shared arrangement and the higher earning parent wants to be able to claim the amount for an eligible dependent.
Up until this case, family law lawyers have for the most part been getting away with identifying the set-off section 3 child support amounts that each parent in a shared parenting arrangement was obligated to pay pursuant to the Federal Child Support Guidelines, but stating that “for convenience only” the higher earning parent would simply pay the difference to the other rather than each parent having to cut a cheque to the other.
The Harder case hinted, and tax experts in Calgary have gave the opinion that in assessing Eligible Dependent claims, CRA will begin to ask for proof of both party’s payment to the other. That is, it somewhat remains to be seen, but there is a good chance that the higher income earner in a shared parenting arrangement will not be able to successfully claim the Eligible Dependent amount (even if otherwise eligible) if that higher income earner cannot prove he/she is also (physically) being paid child support by the other parent. Many divorcing parents are sure to find cutting cheques going both ways redundant and unnecessary, but it does appear this is the direction CRA is going and it will be up to the higher income earners in shared parenting arrangements, and their legal counsel, to ensure agreements and orders are drafted and child support is paid appropriately so that there is no loss or prejudice to that parent’s claim to the ED amount.
The tax implications of separation and divorce are complex, and it is always strongly recommended that client’s obtain sound tax advice from a registered accountant before entering into any agreements with respect to their separation or divorce.