Warning: this article discusses taxes. It may be a good idea to get a cup of coffee before going any further and get all the funny cat videos out of your system first. If you are getting separated or divorced and have children and want to have a quick and easy overview of what you need to know, read on.
First, the basics for those of us that are bit shaky on this stuff (if you’re not, skip down to the part about declaring your marital status to the Canada Revenue Agency).
Credit vs. Deduction vs. Benefit
A tax credit is a deduction against the tax liability you owe the government. This means that if you owe the government $20,000 in taxes at the end of the year but you hold a $5,000 tax credit for some magical reason, you will only pay the government $15,000 in taxes, not $20,000. Value of a tax credit? One dollar of tax credit equals one dollar in your pocket. Very valuable.
A tax deduction is a decrease in the amount of money you pay taxes on. This means that if you earned $60,000 but collected $5,000 in deductions, then you will only pay tax on $55,000. Value of a tax deduction? One dollar of tax deduction equals a portion of that dollar in your pocket, depending on your tax bracket (i.e., 42 cents if your top marginal tax rate is 42 percent).
A benefit (at least in the case of the child benefits I’m talking about in this article) is when the government pays you money. Until the end of this month (June 2016), Canadian families receive the Canadian Child Tax Benefit and the taxable Universal Child Care Benefit.
In July 2016, these benefits are finished and families will receive the Canada Child Benefit as one monthly payment. The Canada Child Benefit will be based on an “adjusted family net income”. Your adjusted family net income is your net income (line 236) on your tax return added to the net income of your spouse on your tax return. In order to get your benefits, even if you didn’t earn any money, you need to file your tax return every year by July.
Importance of informing the CRA of your marital status
Since 2014 (or so Turbo Tax says), you cannot file a joint return with your spouse. This is not America! Spouse or not, you are an economic individual.
For tax purposes, the CRA considers you separated the day you separated—if you remain separated for 90 days or more. You are considered common-law after having lived together for 12 months. This is different than under our Family Law Act in B.C.
To declare your status, you have to fill out this form and send it in.
Why does it matter what your marital status is on your taxes? Well, you’ll have to speak to your accountant for the full story, but, essentially, you can group deductions and maximize benefits in some situations.
What do you need to take away from this?
It is critical that you inform the CRA of your change in marital status, be it common-law, married, or separated. If you get married or are common-law, you may not be entitled to some of the benefits or programs offered to you if your adjusted net family income makes you ineligible. If the CRA catches you not making the declaration and collecting benefits you are not entitled to, then you will have to pay a penalty and likely have to pay back the overpayment of benefits to you.
Why is it critical that you file for your separated status when you can?
Because you may be entitled to benefits that you were not entitled to when you were with your spouse, especially if you are the lower income earner. It’s more expensive than most people realize to maintain two houses instead of one.
Child-care arrangements and how this affects your benefits and credits
When you separate, you will want to notify the CRA of the child-care arrangements you have with your spouse. This can get really sticky and can involve a serious review by the CRA and letters from neighbours, teachers, doctors, and lawyers to prove where your child is living.
Child-care arrangements affect two things: who gets the Canada Child Benefit and who can claim the eligible-dependent credit.
As of 2011, the CRA does recognize a shared-custody or parenting arrangement and will split benefits equally between parents. Other than that, the CRA will pay the benefits to the person who has primary responsibility for the children.
The eligible-dependent credit is a credit of up to $11,237 (in 2015) if you did not have a spouse or common-law partner (or if you did, you were not living with, supporting, or being supported by your partner), maintained a home, and lived in it with your qualifying dependent.
Your qualifying dependent is someone related to you who depends on you for their support, and that includes your child under the age of 18. You cannot split this credit with the other parent.
If you paid child support for your child, you cannot claim this credit. You cannot claim this credit if you and the child’s other parent cannot agree who is going to claim it because both of you maintain a home for your child. If there is only one child between two people, then it is common for parents to take turns claiming the credit each year.
There is a lot more to family and separating family taxes than I have included in this article. These are merely the basics and the biggest issues that you need to be aware of. If you are going through a divorce, you should be consulting with your accountant and your lawyer about the best way to plan your taxes while staying on the right side of the CRA.
There is also a lot of information from reputable sources on the Internet. If you are doing your own research, make sure your information is up-to-date and be sure to check everything against the CRA’s own website, if possible.
A word of caution: you should not act or rely on the information provided in this column. It is not legal advice. To ensure your interests are protected, retain or formally seek advice from a lawyer.