Legal separation refers to the process when the couple stays in different places while still being married legally. This is a better option for those spouses who thinks more about their tax perspectives. Tax advantages of legal separation in Canada can provide you with the benefits you shared as a couple.
In this case, you should talk to your tax professional or accountant because you need to find tax-saving options. Your divorce lawyer may provide you with the forms you will require to inform the authority that you are getting legally separated and want to change the tax file status.
Who Can Get Legal Separation?
If you belong to the common-law partner (not legally married) section, you may get the benefits after separating legally. They are the couples who stayed together for 12 months continuously, and there was no break for more than 90 days. They can file a separation case to the court to get legally separated.
For legally married couples, you need to stay separated in the same state or region after the separation. But you will not be allowed to remarry again before the divorce.
What are the Benefits That You Can Get after Legal Separation?
Even if it is not common, couples often consider living separately than getting a legal divorce. This is because the tax advantages for a legally separated couple are more than a couple who has already divorced.
If a couple wants to get legally separated, they will have the following tax benefits:
Child Support:
When you are legally separated and have a child, the child’s custody and support will be effortless for you to divide. The person who gets the custody will not have to pay taxes. At the same time, the spouse giving the support will not have to pay tax.
Spousal Rollover:
The transaction will happen at cost or on a rollover basis when the transfer results after the settlement for joint law partners. If there is no settlement, you will be in trouble, and you may have to face significant tax impacts on the assets.
You can avoid this tax complication if you are legally separated as you will still be under the Married Filing Jointly act; you don’t need separate tax files, and only the person owning the assets will pay the tax.
Spousal Attribution Rules:
Once one spouse or Law partner transfers assets less than Fair Market Value, only the transferor will pay the tax; even the legal owner now is the other partner.
For example, if you give your spouse $200000 in stock assets as a gift, the dividends on those taxes would be taxed on your tax return although the owner is your ex legally. But this rule terminates when common-law couples or living apart married couples finalize their divorce.
Insurances:
The legal separation is a tax-effective way because your tax on health insurance, car insurance, or life insurance will still be the same as before the marriage. You may need to pay the tax separately if you get divorced.
How Do You File Taxes If You are Separated in Canada?
You can file a Married Filing Separately file for married couples who are separated legally. You must clearly state who will claim a deduction for what item in this file. By this, you can also split any medical bills from your joint account without paying tax.
Tax Tips for Legally Separated Couples Canada:
Here are some tips for the couple who want to walk through the most feasible way of taxation.
Tip 1:
One parent needs to claim tax exemption for children, and the parent will have custody of the kid. A non-custodial parent can now claim the exemption after taking permission from the custodial parents. You may need to fill-up the form, IRS 8332.
Tip 2:
When you are paying Child Support, they are not tax-deductible. And the parent receiving the payment doesn’t need to pay any tax because that doesn’t consider an income.
Tip 3:
In the case of alimony payments, you will need to declare them as income on your tax return and claim the tax deduction if you are paying the alimony.
Actions to Consider During Legal Separation to Get Tax Benefit:
Couples need to get clear concepts on legally enforceable maintenance payment. Here are some issues with that.
Apply for Child Benefits Application:
If you have children and plan to get a divorce, you should apply for the Canada Child benefit provided by the Federal Government. This action is needed so that you can inform the CRA (Canada Revenue Agency) that the parenting arrangements have changed.
Know about Support Payment Consequences:
Another benefit of legal separation is paying spousal support and informing the CRA to deduce the tax for the payment. Because the support is taxable for the recipient, it will be considered income.
However, if you pay the spousal support as a ‘Qualifying Retroactive Lump-Sum Payment,’ there may have some income tax consequences.
Claim the Share Considering the after Cost Value:
While splitting the family assets owned by both of you, claim the asset that will make you less tax to pay. Considering the after-cost value of the investments may help you make your decision.
Transfer the RRSPs, Don’t Cash In:
Transferring the Registered Retirement Savings Plan (RRSPs) shares is not taxable. That is why you should not cash in the money during separation. Only share the savings plan.
Divide Your Registered Investments:
You can transfer registered investments during the separation without worrying about the tax. Moreover, the Divorce Equalization Payments aren’t taxable. Equalization payments are those that the spouse owning the higher total pays to the lower value of assets so that both of the parties can have a fair amount of share.
Deduce Tax on Legal Fees:
The legal fees are tax-deductible for the spouse receiving child support or spousal support but paying the legal fees.
Conclusion:
Dividing your family or business assets is not a straightforward issue for couples who want to get divorced or separated. But to ease the complex situations of dividing property in divorce, you may consider getting separated legally.
To avoid significant long-term tax implications, talk to your lawyer to know about the legal way to avoid paying double tax and know your rights about the tax advantages of legal separation.
FAQs:
How Does Separation Affect Taxes Canada?
You will file your income tax return as a married couple even if the date of your separation is after December 31st. You can only have separate tax files when your divorce is finalized.
Does Separation Affect Taxes?
No, it doesn't affect the taxes. If your tax return is not filed separately, it will not affect you while being separated after marriage. And when your tax is filed as Married Filing Jointly, it will remain the same as while you live separately because you are still married to your spouse.
Are There Benefits to a Legal Separation?
The couples with a legal separation enjoy the benefits of family health insurance plans, income tax benefits of a joint return filing, and spousal retirement money. Since they are still legally married, they can receive these benefits.
Is It Better to File Single or Legally Separated?
It is better to file a legally separated tax policy as separately filed tax may give you higher tax returns than before. You will pay for your tax combined with federal tax, which will be higher than the tax you can pay with a joint return while legally separated.
