Major Life Changes and How It Affects Taxes: The Impact of Marriage, Divorce, and Having a Child

Life is full of big changes that can have a big impact on your finances and taxes, including your tax return. From marriage to divorce and having a child, these events have tax implications that affect everything from your deductions to your credits. Know how these changes impact your taxes, especially during tax season when every little bit counts.

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As a tax accountant with Tax Warriors in Toronto, Canada I have seen these changes happen to my clients. This guide will go through the tax implications of marriage, divorce and having a child under Canadian tax laws so you can be prepared. Knowing the impact of these life events will help you claim credits and deductions now and save you money when it counts.

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Marriage, Common Law Partner and Taxes

Marriage is a big life change and it brings changes to your tax situation too. In Canada common law partnerships are treated the same as married couples, where a common law partner can affect your tax liabilities. Canada doesn’t require couples to file taxes jointly like some other countries but your marital status still plays a big role in your tax returns.

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Combining Incomes

One of the biggest changes after marriage is the combining of incomes. You and your spouse will still file individual tax returns but your combined incomes will affect your eligibility for various tax credits and benefits. For example, if one spouse has a lower income, this can affect your eligibility for certain credits and tax deductions.

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Spousal Amount

The spousal amount is a non-refundable tax credit for those who support a spouse with a lower income. For the 2023 tax year if your spouse’s net income is less than $13,229 you can claim the spousal amount which reduces your taxable income.

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Transferable Tax Credits

Some tax credits can be transferred between spouses. For example if one spouse can’t fully use their disability tax credit the unused portion can be transferred to the other spouse. Other transferable credits include the age amount, pension income amount and tuition, education and textbook amounts.

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Pension Income Splitting

Pension income splitting allows spouses to share up to 50% of eligible pension income which can reduce the overall tax burden. This is especially beneficial if one spouse is in a higher tax bracket. Eligible pension income includes payments from registered pension plans and certain annuities.

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​Divorce and Taxes

Divorce is a big and emotional process and it also has big tax implications. Your change in relationship status will affect your tax obligations so you need to know how much tax and navigate these changes to avoid the pitfalls.

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Spousal Support

Spousal support is tax deductible for the payer and taxable for the recipient. This shifts taxable income between former spouses. To be deductible, these payments must be specified in a written agreement or court order and correctly reported on your tax return.

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Child Support

Unlike spousal support child support is neither deductible for the payer nor taxable for the recipient. This is an important distinction when negotiating settlements and understanding the tax implications.

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Division of Assets

The division of assets during a divorce can have tax implications especially on capital gains and losses. Transfers between spouses can be done on a tax deferred basis meaning no tax is triggered immediately. However future dispositions of these assets will be based on the original purchase price and can result in big capital gains.

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Having a Child and Taxes

Having a child is one of the most wonderful and life changing events and it also brings new tax considerations. Canada has various credits and benefits to help parents with the cost of raising children like the Canada Child Benefit (CCB) a tax free payment that gives financial assistance without adding to your tax burden.

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Canada Child Benefit (CCB)

The Canada Child Benefit (CCB) is a monthly tax free payment to help qualified families with the expenses of raising children under 18. The amount is based on your family’s net income and the number of children you have. For the 2023 tax year the maximum annual benefit is $6,997 for each child under 6 and $5,903 for each child 6 to 17.

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Child Care Expenses

Parents can claim a tax deduction for child care expenses incurred so they can work, attend school or conduct research. The deduction is $8,000 per child under 7, $5,000 per child 7 to 16 and $11,000 for children eligible for the disability tax credit. In addition to child care expenses, certain medical expenses for your child may also be deductible, providing further tax relief.

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Child Disability Benefit

The Child Disability Benefit is a tax free payment available to families who support a child under 18 with a significant and lasting impairment in physical or mental abilities. This benefit is based on the family’s net income. For the 2023 tax year the maximum annual benefit is $2,985 per eligible child.

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Tax Planning for Life Changes

Life changes require tax planning and knowledge of Canadian tax laws. Here are some tips:

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Keep Records

Keep all relevant documents, marriage certificates, divorce decrees and child care expense receipts. Accurate records are required to claim credits and deductions and to substantiate your claims in case of an audit.

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Consult a Tax Professional

Life changes can bring complex tax situations that require professional advice. A tax accountant can help you navigate life changes and taxes together, optimize your tax situation and ensure tax compliance.

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Update Your Info

Make sure to update your personal information with the Canada Revenue Agency (CRA) for your new job, marital status, custody arrangements or changes in family size so you receive the right benefits and credits.

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Adjust Withholding and Instalments

Life changes can affect your tax liability. Consider adjusting your tax withholding or instalment payments to avoid underpayment penalties or big tax bills at year-end.

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Specific Credits and Deductions

Spousal Amount

The spousal amount can reduce your taxable income if you are supporting a spouse with a lower income. For the 2023 tax year the maximum claim is $13,229 less your spouse’s net income. This credit is particularly useful if one spouse is not working or earning much less, so the higher earning spouse’s tax burden is reduced.

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Pension Income Splitting

Pension income splitting is a great tool for retired couples. By splitting eligible pension income you can use both spouses’ lower tax brackets and reduce the family tax bill. For example if one spouse has $50,000 of pension income and the other has no income, splitting the pension income allows both to benefit from lower tax rates and potentially save thousands of dollars in taxes.

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Child Support and Spousal Support

Understanding the tax treatment of child and spousal support is important in divorce. Child support is straightforward, no tax implications for either party. Spousal support is more complex. For the payer, spousal support is tax deductible reducing taxable income. For the recipient, it’s taxable income. Structuring support payments strategically can have big tax benefits for both parties, but it is crucial to report them accurately on your tax return.

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Maximize the Canada Child Benefit

The Canada Child Benefit is a big financial boost for families. To maximize this benefit you need to report your family’s net income accurately and update any changes in your family situation promptly. The benefit decreases as family income increases so effective tax planning to reduce net income (like maximizing RRSP contributions) can increase the CCB received.

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Child Care Expenses

Child care expenses can add up fast but are deductible if they meet certain criteria. Eligible expenses include daycare centres, nannies and day camps. The lower income spouse must generally claim these expenses and proper documentation is required. Claiming these expenses can give big tax relief especially for families with young children.

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Child Disability Benefit

The Child Disability Benefit is extra support for families caring for a child with disabilities. To qualify your child must be eligible for the disability tax credit. The full benefit is tax free but income tested so higher family incomes will get a reduced benefit. Ensuring you are eligible for the disability tax credit and reporting your family’s income accurately is key to maximizing this benefit.

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Tax Strategies

Tax Planning for Married Couples

Married couples should plan their finances. Strategies:

• Income Splitting: Where possible split income to use lower tax brackets.

• Maximize Deductions and Credits: Transfer unused credits between spouses and claim all eligible deductions.

• Joint Investment Accounts: Consider the tax implications of joint investment accounts and how income is attributed between spouses.

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Divorce Tax Planning

Divorce is financially tough but planning can reduce the tax impact:

• Support Payments: Understand the tax implications of spousal vs child support when negotiating settlements.

• Asset Division: Consider the tax implications of dividing assets especially those with big capital gains.

• Update CRA: Make sure the CRA is informed of your change in marital status to adjust benefits and credits.

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Benefits for Families with Children

Families can do the following to reduce financial burden and optimize their tax situation:

• Claim All Benefits: Make sure you’re getting all benefits like CCB and child disability benefits.

• Plan Child Care Expenses: Keep track of all child care expenses to maximize deductions.

• Registered Accounts: Consider setting up a Registered Education Savings Plan (RESP) for your child’s future education costs.

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Examples

Example 1: Spousal Amount

John and Mary just got married. John makes $80,000 and Mary is in school with no income. John can claim the spousal amount of $13,229 reducing his taxable income and saving around $2,000 in taxes. By understanding and using this credit John and Mary can reduce their tax burden in the early years of their marriage.

Example 2: Pension Income Splitting

Jim and Susan are both retired. Jim gets a pension of $60,000 and Susan has no pension income. By splitting Jim’s pension income they can reduce their combined tax liability. After splitting the income Jim and Susan each report $30,000 and pay less overall taxes due to their lower tax brackets. This saves them around $3,000 per year.

Example 3: Divorce and Tax

Lisa and Mark are getting divorced. Mark will pay Lisa $1,000 per month in spousal support. Since these are tax deductible for Mark and taxable for Lisa they decide to structure the support payments to minimize tax. They also agree on child support and since these have no tax implications they do that too. By structuring the support payments right both Lisa and Mark benefit.

Example 4: CCB

Sarah and Tom have 2 children under 6. With a combined family income of $70,000 they are eligible for the maximum CCB. To maximize the benefit Sarah contributes to her RRSP reducing their net family income and increasing their CCB entitlement. This strategy gives them an extra $500 per year in CCB payments.

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Bottom Line

Life changes like marriage, divorce and having a child bring big tax implications. Understanding these changes and planning for them can help you optimize your tax situation and get all the credits and deductions you’re entitled to. Whether you’re combining incomes with a new spouse, navigating the divorce tax maze or maximizing benefits for your children, tax planning is key to making the most of your situation during these life changing events.

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FAQs

Q: Do I need to notify the CRA of my new marital status as soon as I get married?

A: Yes, you should notify the CRA as soon as possible so at tax time your benefits and credits are calculated correctly.

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Q: Can I split my pension with my spouse or common law partner?

A: Yes, pension splitting is available to married couples and common law partners.

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Q: Are support payments always tax deductible?

A: Support payments are tax deductible for the payer and taxable for the recipient if made under a court order or written agreement.

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Q: How does having a child affect my tax credits?

A: Having a child can make you eligible for more tax credits and benefits, such as the CCB and child care expense deductions.

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Q: What records do I need to keep for child care expenses?

A: Keep receipts, invoices and records of payments made for child care services. These are required to support your claim.

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