Avoiding Tax Issues

This post deals with potential tax issues arising out of separation and parenting, in the Canadian context. The focus is on how to avoid them during the time between when you’ve separated, and when there is a separation agreement or a divorce certificate is issued by the court.

After I filed my first income tax return following separation, one on which I had changed my relationship status from married to separated, I received a surprise. It was a letter from the CRA, asking me to verify that I was indeed separating, and not pretending in an effort to avoid paying my fair share of income tax.

To be fair, I don’t know if that was the CRA’s intent. Yet that was how I felt. I hadn’t seen it coming, and it threw me into a tailspin.

You see, I didn’t have any proof that we’d separated. The house and mortgage continued to be in both our names. I hadn’t changed the utilities from his name. The only evidence that existed that we were separated was in his possession.

To respond to CRA, I had to ask my former spouse for a copy of the rental agreement he’d signed for his apartment. We settled on him provided me with copies of two cancelled cheques payable to his landlord.

I was lucky because he agreed to share this information with me.

Since then, I’ve encountered countless parents who’ve separated, and then, sometimes years later, receive a letter from CRA, asking them to verify living situations AND PARENTING ARRANGEMENTS. This can be a nightmare, especially if there isn’t any paperwork that confirms their living situation and parenting arrangements.

From these conversations, I’ve learned that if parents have separated and continue to live in the same house, it is much simpler to continue to file their taxes as if they are married. When they say they’re separated and live at the same address, CRA concludes child tax benefits have been overpaid. Either a family must repay the overage, or the government sets off the amount owing to it, from payments it makes to the parents.

This is why my opinion is, when you have children and are living in the same house, keep checking “married or common-law” in the relationship box on your income tax.

If one of you moves out, I have prepared an infographic which describes 5 steps you can take to avoid tax issues after separating, and before divorce. It is short and easy to use. Click here to receive your copy now.

If you have questions after reading it, book a fair & family-focused divorce consult, and I’d be happy to answer your questions.