How separation affects your taxes in Canada

Taxes are probably not the first thing on your mind after a separation. But a few decisions in the first months, especially about benefits, support and retirement savings, can cost or save thousands of dollars, and they are much easier to get right early than to fix in April.

Canada has no joint tax returns, so you each file your own return as before. What changes is your marital status for benefits and credits, how support is taxed, and how assets can move between you.

The date of separation matters immediately

For tax purposes, the CRA considers you separated when you start living separate and apart because the relationship has broken down, and the separation lasts at least 90 days. Once 90 days have passed, your separated status takes effect from the day you started living apart. The clock starts when you began living separately, not when you signed anything. It can be possible to be separated while still living under the same roof, but it is harder to show. Our guide to why your separation date matters explains how to document it.

The CRA asks you not to report a separation until you have been apart for more than 90 days. After that, tell them by the end of the month following the month your status changed. You can update your status in My Account, by phone, or with Form RC65. Benefits are adjusted from the month after your status is updated, so delays can mean receiving the wrong amount and having to repay it later.

Your return reports your marital status on December 31. If you separated in the autumn and the separation lasts at least 90 days, you will normally report yourself as separated for that year.

The Canada Child Benefit after separation

The Canada Child Benefit (CCB) is a tax-free monthly payment based on your adjusted family net income. After separation, it is calculated on your own income rather than your combined income, which often increases the amount for the lower earner.

If the children live with one parent most of the time, that parent receives the CCB. If they live with each parent at least 40 percent of the time, the CRA treats it as shared custody and each parent receives 50 percent of what they would get if the children lived with them full time, based on their own income. So the two payments are often different amounts.

Each parent needs to apply or update their own CCB account after separation. You cannot keep receiving the full benefit and split it informally. If you later move in with a new partner, their income counts once you have lived together for 12 continuous months or have a child together.

Is child support taxable in Canada?

Child support paid under a court order or written agreement made after April 1997 is not deductible for the payor and not taxable for the recipient. Neither of you reports it as income or a deduction. (Older agreements can have different treatment; if yours predates May 1997, ask an accountant.)

That is one reason the child support tables are based on the payor's gross income: the amounts already assume no tax effect.

A related rule catches many parents: if you are required to pay child support for a child, you generally cannot claim the amount for an eligible dependant for that child. In shared parenting where both parents are required to pay support, one of you may still claim it, but only if you agree who will.

Is spousal support taxable in Canada?

Spousal support is treated very differently. If it is paid periodically, under a written agreement or court order, while you are living apart:

• The paying spouse deducts it from their income.
• The receiving spouse includes it in their income and pays tax on it.

This matters for the real value of support. When support moves income from a higher tax bracket to a lower one, the household as a whole pays less tax. Well-structured agreements can use this so the recipient nets more at a lower after-tax cost to the payor. If you receive spousal support, set aside a portion of each payment for tax, or ask to have tax instalments or extra withholding arranged.

A few details that cause trouble:

• Lump sums are generally neither deductible nor taxable, except in limited cases such as a payment of overdue periodic support.
• Payments made before the agreement is signed can count if the agreement says so and they were paid in that year or the year before. If you are paying informally now, make sure the final agreement includes this wording.
• In the year you separate, a payor can either deduct spousal support or claim the spouse or common-law partner amount, not both.

Our spousal support guide explains how the amount itself is worked out.

RRSP and RRIF transfers between spouses

Retirement savings are often the largest asset after the home. The Income Tax Act lets RRSP and RRIF funds be transferred directly from one spouse's plan to the other's on the breakdown of a marriage or common-law relationship without immediate tax, as long as:

• You are living separate and apart at the time of the transfer
• The transfer is required by a court order or written separation agreement dividing property
• It goes directly, institution to institution, using CRA Form T2220, into the receiving spouse's RRSP or RRIF

The common and expensive mistake is withdrawing the money first and handing it over. A withdrawal is taxable to the account holder, with tax withheld at source. Do not touch the funds until the direct transfer is complete. Workplace pensions and CPP have their own rules, covered in pensions at separation.

Is there capital gains tax on the family home at separation?

The principal residence exemption shelters the gain on a home that was your principal residence for the years you owned it. For most couples who sell the family home, or transfer it to one spouse, there is no capital gains tax.

It gets more complicated with a cottage, rental property or investments. Transfers between spouses on separation generally happen at cost, so there is no immediate tax, but the receiving spouse takes on the built-up gain and pays the tax when they eventually sell. A rental property with a $200,000 unrealised gain is worth less to the person receiving it than a $200,000 cash payment. Factor that into the property division, and ask an accountant to estimate the future tax before you agree.

If you own two properties, only one can generally be designated as the family's principal residence for any year while you were together, so think carefully about which property uses the exemption for which years.

GST/HST credit

The GST/HST credit is also income-tested and is recalculated using your own income once the CRA knows you have separated. Payments are adjusted from the month after your status changes. This is another reason to update your status promptly after the 90 days.

Legal fees

Some legal and accounting fees connected to support are deductible. A recipient can generally deduct fees paid to enforce a right to support, such as collecting late payments. A payor cannot deduct fees spent defending a support claim or trying to reduce support. Keep your invoices and ask your lawyer to break down what the work was for.

Common mistakes

Not telling the CRA. Benefits and credits continue on your combined income until the CRA knows. The repayment, when it comes, can be large.

Withdrawing RRSP funds before transferring them. A direct transfer using Form T2220 is tax-deferred. A withdrawal is taxable, and the difference can be thousands of dollars.

Not updating the CCB. One parent may keep receiving the full benefit while the other receives nothing, and the CRA will eventually correct it, often by asking for repayment.

Paying spousal support with no written agreement. Without a written agreement or order, the payor generally cannot deduct the payments.

Treating child support as taxable or deductible. Under post-April 1997 agreements it isn't, and claiming it triggers a reassessment.

What to do this week

1. Write down your separation date and keep evidence of it, such as a lease, change-of-address confirmation or a dated message.
2. Diarise the 90-day mark, then update your marital status with the CRA by the end of the following month.
3. Apply or update the CCB for the children, and agree with the other parent who will claim the eligible dependant amount.
4. If you are paying spousal support informally, keep proof of every payment and make sure your agreement refers to it.
5. Do not withdraw from any RRSP to settle with your ex. Wait for the agreement and use Form T2220.
6. Book an accountant for your first tax year after separation. The year you separate is usually the most complicated one, and professional help usually pays for itself.

Common questions

When should I tell the CRA I am separated?

After you have been living apart for more than 90 days. Then tell the CRA by the end of the month following the month your status changed. Your separated status takes effect from the day you started living apart.

Is child support taxable in Canada?

No. Child support under a written agreement or court order made after April 1997 is not taxable for the recipient and not deductible for the payor.

Is spousal support tax deductible?

Yes, if it is paid periodically under a written agreement or court order while you live apart. The recipient must include it in income. Lump sums are generally neither deductible nor taxable.

Who gets the Canada Child Benefit after separation?

The parent the children live with most of the time. If each parent has the children at least 40 percent of the time, each receives half of what they would get with full-time custody, based on their own income.

Can I transfer my RRSP to my ex without paying tax?

Yes, if you are living apart, the transfer is required by a written agreement or court order, and it goes directly between plans using Form T2220.

This guide is legal information, not legal advice, and it is written for a general audience across Canada and the United States. Family law is provincial and state-based and changes over time. Before you rely on anything here for your own situation, confirm it with a qualified family lawyer in your province or state. FairWell can connect you with one through the professional directory.