A change in your family situation can change your tax return significantly — sometimes in ways that generate a meaningful refund, and sometimes in ways that create unexpected obligations if not handled properly. Here is what Alberta residents need to know about three of the most common major life changes.
Separation and Divorce
Your marital status as of December 31 determines how you file. If you were legally separated for at least 90 consecutive days during the year and the separation was due to a breakdown of the relationship, you can change your status to separated on your return. The date your separation status becomes effective determines which benefits and credits you are entitled to and how they are calculated.
Child and spousal support payments have specific tax treatment. Spousal support paid under a written agreement or court order is generally deductible to the payer and taxable income to the recipient. Child support payments made under agreements established after May 1997 are generally not deductible to the payer and not taxable to the recipient.
Child care expenses and the Canada Child Benefit are typically claimed by the lower-income spouse after separation. Transfer of RRSP assets between spouses as part of a property settlement can generally be done without immediate tax consequences if done under a written separation agreement or court order, but this must be done correctly to preserve the tax deferral.
Source: Canada Revenue Agency. Marital status. canada.ca; Canada Revenue Agency. Support payments. canada.ca
Death of a Spouse or Family Member
When a taxpayer dies, a final T1 personal income tax return must be filed for the year of death, reporting all income earned from January 1 to the date of death. The deadline for this return depends on when in the year the death occurred. If the death was between January 1 and October 31, the return is due April 30 of the following year (or June 15 if the deceased or the deceased’s spouse was self-employed). If the death occurred between November 1 and December 31, the return is due six months after the date of death.
On death, registered accounts such as RRSPs and RRIFs are generally deemed to be fully withdrawn and included in the deceased’s income in the year of death, unless they are transferred to a surviving spouse or a financially dependent child or grandchild, in which case the inclusion can be deferred or managed differently.
The estate may also be required to file T3 trust income tax returns in subsequent years if the estate earns income during the period of administration.
Source: Canada Revenue Agency. Doing taxes for someone who died. canada.ca
New Child — Benefits and Deductions
The birth or adoption of a child triggers eligibility for several federal and provincial benefits. The Canada Child Benefit (CCB) provides tax-free monthly payments to eligible families with children under 18. The amount depends on family net income and the number and age of children. You must apply for the CCB after the birth or adoption — it is not applied automatically.
Child care expenses paid to allow you or your spouse to work or attend school are deductible up to prescribed limits based on the age of the child. For children under 7, the maximum annual deductible amount is $8,000. For children aged 7 to 16, the maximum is $5,000. For children with a severe disability, the limit is $11,000. The deduction is generally claimed by the lower-income spouse.
Alberta also has its own provincial non-refundable tax credits for child care and adoption expenses that are calculated separately from the federal amounts.
Source: Canada Revenue Agency. Canada Child Benefit. canada.ca; Canada Revenue Agency. Child care expenses. canada.ca
Update Your Marital Status With the CRA
Any change in marital status — marriage, separation, divorce, or the death of a spouse — should be reported to the CRA as soon as possible. Your marital status affects the calculation of several benefits and credits, including the GST/HST credit and the Canada Child Benefit. Overpayments of these benefits resulting from a failure to update your status must be repaid.
You can update your marital status online through My Account on the CRA website, by phone, or by completing and sending Form RC65.
Key Takeaway: Life changes create tax consequences that most people are not aware of until they file. The year of a major life event is often the year most worth having a CPA review your return.
Nguyen Scott LLP helps Edmonton and area residents navigate the tax implications of life changes. Contact us at nsllp.ca/contact-us/ or call 780-458-5479.