Understanding & Resolving the Tax Implications of Grey Divorce

Jul 4, 2022

A recent article in The Globe and Mail opened in the following way: “Call them what you want – diamond divorcees, silver splitters or grey divorcees – but data show that older Canadians are ending their long-standing marriages in greater numbers than ever before.”

The article goes on to cite Statistics Canada, who report that the number of divorced Canadians over age 65 grew by nearly 80 per cent from 2010 to 2020. That’s partly due to the aging population in this country, but not entirely a result of it (as the Globe states, “the population of married individuals over 65 grew by only 45 per cent in the same period”).

One of the least pleasant transitions in life is divorce. And while divorce is, self-evidently, the end of something, it ought to be the beginning of something else – an examination of its tax implications for both parties.

It’s Complicated

While divorce is complicated by innumerable other issues – emotional, logistical and more – money (and therefore tax) almost always ends up underpinning the process. For example, “when you and your spouse divide up your real estate, savings, investments and pensions, this is called the division of assets. Paying your spouse their half of the assets is called an equalization payment and an asset transfer.”

Assuming you and your spouse have considerable assets to divide – which rules out resorting to one of those quickie online turbo divorce procedures – you are looking at the following fundamental issues:

  1. Division of property
  2. Support payments
  3. Tax deductible expenses
  4. Eligibility for government credits

Each of these is financially complex, so we can’t emphasize strongly enough how important it is to recruit a professional to help you stick-handle the process. Two key points to remember before you proceed:

  • Try to establish some general guidelines between the two of you in advance of retaining expert help. It will speed the process and minimize costs.
  • An amicable divorce is considerably cheaper than an acrimonious divorce. Try to avoid the latter.

1. Division of Property

Chief among assets eligible for division are:

  • The family home(s) – almost always the largest asset.
  • RRSPs, RPPs, DPSPs & RRIFs – upon the breakdown of a marriage, an individual can transfer assets to their former spouse’s registered plan on a tax-deferred basis. Once the assets are transferred to the former spouse, the receiving spouse will be liable for future tax obligations when the amounts are withdrawn.
  • Registered Education Savings Plan (RESPs) – remember, the beneficiaries of the plan are the children and not the spouses. However, the subscribers (usually the parents or grandparents) of the RESPs do have the ability to control the funds within the RESP and can choose to withdraw the funds.
  • Tax Free Savings Account (TFSAs) – when there’s a breakdown in a marriage, amounts within a TFSA can be transferred directly from one spouse’s TFSA to the other’s TFSA without affecting the receiving spouse’s contribution room.
  • Canada Pension Plan (CPP) – contributions made during the time when a couple was married can be equally divided during or after a divorce or separation.
  • Private pension plan – funds in private (employer-sponsored) pension plans accumulated while the couple was married may be included in family property and be subject to division upon separation, usually 50%.

2. Support Payments

Spousal support is taxable in the hands of the receiving spouse and deductible for the paying spouse. Certain conditions need to be satisfied, however, and you are advised to seek professional help in determining what those conditions are and whether they apply in your specific situation.

3. Tax Deductible Expenses

Legal fees incurred to get a divorce, to establish custody of or visitation arrangements for a child are not tax deductible. The legal fees incurred for the following are deductible for tax purposes:

  • Fees incurred in relation to enforcing payment or defending against a reduction of spousal support.
  • Fees incurred to try to make child support payments non-taxable.

4. Eligibility for Government Credits

Government credits include the Canada Child Benefit, GST/HST credit and the eligible dependent tax credit. All are encumbered with qualifications and restrictions, so you really need a professional to help you clarify and resolve them.

Don’t Go It Alone

The divorce process can be brutal. Emotionally. Financially. Logistically.

Transitioning through the process without professional help is unwise. Why? Because that professional help involves resolving tax and legal issues which most of us are not qualified to solve. Especially if children and/or grandchildren are involved, that resolution process can go a long way towards the maintenance of future family cohesion.

As always, our credit union partners have advisors available to help you through the financial elements of this process. Give one a call at either Coastal Community Credit Union, Coastal Community Private Wealth Group or Interior Savings.

Recent Posts

Aviso Weekly Market Pulse: May 20th – May 24th

Market developments Equities: U.S. stocks climbed after data showed consumers tempered their inflation expectations in late May. The S&P 500 had its fifth straight week of gains, the longest bullish streak since February. It topped 5,300 and the Nasdaq 100 rose...

NEI Monthly Market Insights: April 2024

Robust earnings helped mitigate fear of persistent inflation Market sentiment turned bearish in early April for both equity and fixed income markets as sticky U.S. inflation data fuelled market fears that central banks will not ease monetary policy as quickly as...

Aviso Weekly Market Pulse: May 13th – May 17th

Market developments Equities: The stock market has been rallying recently, with the S&P 500 on track for its fourth straight weekly gain. This has been fueled by hopes of Federal Reserve rate cuts following some positive inflation reports, as well as strong...

Aviso Weekly Market Pulse: May 6th – May 10th

Market developments Equities: The S&P 500 closed near 5,225, for its third straight weekly gain, while the Dow rose for an eighth consecutive session. The stock market lost momentum after economic data pointed to a slowing economy amid persistent inflationary...

Aviso Weekly Market Pulse: April 29th – May 3rd

Market developments Equities: The economic data to close out the week was seen as a "Goldilocks" scenario by markets, indicating the economy is cooling enough for the Federal Reserve to likely start cutting interest rates as soon as September. The S&P 500 rose by...

NEI Monthly Market Insights: March 2024

Unstoppable equity market rally on soft landing narrative Resilient economic data throughout the first quarter supported the soft landing narrative and pushed equity markets around the world to new record highs. Global equities posted strong returns with the MSCI ACWI...