Spousal Separation

One of the most difficult life events is the separation of spouses. Throughout this process, there are a large number of personal and financial implications for most families. This article covers a select number of relevant tax implications should you find yourself in this situation.

General matters:

For tax purposes, you are considered to be separated once you have been living apart for ninety days. Once this deadline has passed you must inform CRA of the change in status so that they are able to adjust any benefits or credits (such as the Canada Child Benefit or GST credit) you are receiving based on your family net income.

This can be done either by phone or by sending in the marital change status form.

You may also need to update your address using form RC325 or via CRA MyAccount. For security reasons, CRA does not allow us to update this on your behalf.

Legal fees related to your separation may be deductible on your personal tax return. But only if they relate to collecting or increasing support payments. The actual legal costs associated with the divorce proceedings are not deductible.

Lastly, for a taxpayer who is paying child support to their former partner while you may have otherwise met the conditions to claim a credit for an “eligible dependent” you would be restricted from claiming this credit.

Split of marital assets:

Over time spouses will jointly accumulate a shared pool of wealth. As part of the separation proceedings, there will be a negotiation between the parties as to how to evenly divide the marital assets. General comments related to the tax implications of the split of these assets are as follows:

• Registered accounts (TFSA, RRSP) – Typically RRSP withdrawals are a taxable transaction. However, an exemption is made when accounts are split or transferred as part of a marital breakdown. Form T2220 allows for a tax-free transfer to the RRSP of the former spouse if the split is occurring as a result of a written separation agreement or court order.

  TFSA’s are also able to be transferred to the separated spouse without impacting the recipient’s contribution room if it occurs as a result of a court order or written separation agreement.

• Non-registered investments – These types of accounts can also be transferred without tax implications if they are able to be moved at the adjusted cost base. A written election signed by both former spouses must accompany the return of the transferee indicating that ITA Section 74.2 should not apply to the transfer as a result of a breakdown in the relationship. 

• Marital home – The marital home can either be sold to a third party, have one party buy out the other, or converted into a rental property. Considerations such as the principal residence exemption and a “change in use” of the property will be different for everyone and should be discussed with your advisor.

• Private corporation shares – Arguably the most difficult and expensive asset to separate is the shares of a private corporation that the former spouses jointly own. While it may be possible for one partner to buy out the other at fair market value, there are often practical restrictions due to the cash flow/debt needed to initiate a buyout or reluctance from the seller to trigger a gain that may not be offset by their Lifetime Capital Gains Exemption.

  In such situations, alternatives including the use of a “butterfly” transaction to separate the assets of the corporation, by moving certain assets on a tax deferred basis to a new corporation, may be considered. Both parties would need to agree on a fair split of the corporation’s assets in order to move forward. These types of transactions can also be cost prohibitive.

Spousal and child support:

A final consideration is that as a result of a court order or written agreement a taxpayer may be required to make periodic payments to their ex-partner for spousal and/or child support.

Child support payments are neither taxable to the recipient nor deductible to the payor for agreements made after April 1997.

Spousal support payments are generally deductible to the payor and taxable to the recipient. However, the payments must be made pursuant to a court order or agreement and all child support payments in the current and prior year must be fully paid before a deduction for spousal support is allowed. Please note that lump-sum payments would not typically qualify as the payment would not be considered periodic.

It is also strongly advised that once the written agreement is in place it should be registered with CRA as soon as possible. Without the registration, CRA will not be able to confirm that your payments were made pursuant to a written agreement or court order and will likely deny the deduction.

Form T1158 can be used to register the agreement and any subsequent updates to the agreement should be sent in the same manner. If updated agreements are not registered, CRA will refer back to the most recent agreement on file when processing the claim for the spousal support deduction. This can result in a lot of back and forth with various personal tax adjustment filings.

Due to the various nuances and specific criteria in order to allow for tax-free transactions, you should always consult your advisors before taking any actions. We are here to help.

The above material is current as of March 27, 2025.

The information presented is a general overview and not intended to cover specific situations. You should consult with your professional advisors directly before taking any action.

Vertefeuille Rempel Chartered Professional Accountants LLP, its partners, employees and agents do not accept or assume any liability by anyone relying on the information presented.