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tax matters

I've heard of divorce battles going on for quite a while. The story of Frances and Philip Ragusa, however, takes the cake. Their battle lasted for 34 years, starting in 1977, until Frances was 75, and Philip 77. Frances was making a claim for child support of $14,394, which Philip hadn't paid. The amount, with interest, grew to be about $100,000.

If you're going through a marriage breakdown, the best advice is to wrap things up sooner, rather than later. And take the time to understand the tax implications of splitting up. Here are the top tax issues to consider when you part ways:

The meaning of being 'married'

For tax purposes, the definition of "married" matters a lot. Even common-law partners can be considered married if they've been living together in a conjugal relationship for at least 12 months, or they have a child. When does marriage end? In a legal marriage, you'll usually separate for a time and then your relationship ends officially when you obtain a divorce. For tax purposes, your status as "married" is considered to have ended on the day you started living separately, provided you've been living separately and apart for 90 days or longer.

Dividing up assets

When you separate, you may be required to divide up assets. Generally, you'll be able to transfer assets between the two of you without a tax hit. Capital property (most assets) can transfer at adjusted cost base (ACB) so that the recipient spouse inherits the current ACB of the property, and there's no tax to pay on the transfer. Registered Retirement Savings Plan (RRSP) assets can transfer directly to the other spouse's RRSP without a tax hit. It's the same with assets in a Tax-Free Savings Account (TFSA). In the case of a TFSA, the transferor doesn't receive a reinstatement of contribution room.

Sharing pension assets

Canada Pension Plan credits earned by both spouses during marriage can be combined and split without any immediate tax. Other pension plan assets can often be split without tax, but speak to a lawyer in your province, since family law and pension law are provincial matters.

Tax on support payments

Spousal-support payments are generally deductible to the payer, and taxable to the recipient. Lump-sum payments that reflect arrears support for prior years are generally taxed when received, but the recipient can request to be taxed as though they were received in those prior years if this works out better and if the amount that applies to previous years is $3,000 or more (not including interest). Child-support payments are generally tax-free to the recipient and not deductible by the payer (an exception applies with some pre-May, 1997, support orders or agreements).

Deductibility of legal fees

Legal fees are generally deductible if they relate to collecting late support payments, establishing a right to support, increasing your support, or to make child support payments tax-free. If you're the payer of support, legal fees are generally not deductible. Nor are fees related to child custody or visitation issues. If your deductible legal fees happen to exceed your income in a year, a non-capital loss is created which can then be carried forward, or back, to other tax years.

Personal tax credits and deductions

Each spouse may be entitled to the eligible dependant amount. Only one spouse can claim the amount for a particular dependant, so if you have more than one child, it often makes sense to each to claim the credit in respect of different children, otherwise you'll need to agree on who will claim the credit.

As for child-care expenses, you can claim expenses incurred by you for the period your child resided with you. Finally, in the case of tuition, textbook and education credits, a student can transfer these credits to either parent, but not a portion to both, which will require agreement between you and your spouse.

Universal Child Care Benefit

If one parent has custody of children, then the UCCB will be paid to that parent. With shared custody, you can apply to split the payment equally between the two of you. The UCCB is taxable, and if you're single at the end of the year, you have the option of reporting the income yourself, or in the hands of your dependant.

Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.