Understanding & Resolving the Tax Implications of Grey Divorce

An 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, we welcome you to contact a Coastal Community Private Wealth Group advisor for personalized advice.