RRSP transfers, principal residence exemption, child support tax rules, spousal support deductions — the CRA implications of separation that most people miss.
Separation and divorce have significant income tax implications that many people discover only after the fact — sometimes with costly consequences. While a family lawyer can explain the general rules, you should always consult an accountant or tax professional for advice specific to your situation. This article covers the key CRA rules that apply on separation in BC.
Child Support — Not Deductible, Not Taxable
Under rules that took effect on May 1, 1997, child support paid under an agreement or court order made after that date is neither deductible for the paying parent nor income for the receiving parent. This is the opposite of the pre-1997 rules, which many older agreements still reflect. If you have a pre-1997 order that has never been varied, different rules may apply — get tax advice.
Spousal Support — Deductible and Taxable
Spousal support (also called alimony) follows the opposite rule. Amounts paid as spousal support under a written agreement or court order are:
- Deductible for the paying spouse from their taxable income
- Taxable income for the receiving spouse
This has important practical implications. A high-income payor in a 40% marginal tax bracket pays
RRSP and RRIF Transfers on Marriage Breakdown
Under section 146(16) of the Income Tax Act, you can transfer funds from your RRSP or RRIF directly to your spouse's or former spouse's RRSP or RRIF on marriage breakdown — without triggering tax at the time of transfer. This is called a spousal RRSP rollover and it requires one of the following:
- A court order, or
- A written separation agreement
The transfer must be a direct transfer between institutions. You complete CRA Form T2220. If the funds are first withdrawn by the owner and then paid to the spouse, normal withholding tax applies — a costly mistake to avoid.
TFSAs — No Rollover Available
Unlike RRSPs, there is no tax-sheltered rollover provision for TFSAs on marriage breakdown. Each spouse's TFSA is valued at fair market value and the amount is included in family property subject to division. If one spouse's TFSA is more valuable, the other spouse receives an equalization payment — but the money itself does not transfer inside the TFSA structure. Each party's available TFSA contribution room remains unchanged.
The Principal Residence Exemption
If you and your spouse jointly owned your home, the home may have a large accrued capital gain. On a transfer of the matrimonial home between spouses on separation, there is a rollover under the Income Tax Act — no capital gain is triggered at the time of transfer if done pursuant to a court order or written agreement. The receiving spouse inherits the adjusted cost base of the original purchase price. When they eventually sell, the principal residence exemption can shelter any gain, subject to the rules about which years the property was designated.
Canada Child Benefit After Separation
The Canada Child Benefit (CCB) is paid to the parent who is the "primary caregiver." When parents share custody equally (40% or more parenting time each), CRA alternates the CCB monthly between parents. When custody is not equal, the primary residential parent receives the full CCB. You must notify CRA of your changed marital status (form RC65) within 30 days of separation.
Filing Status Changes
You must notify CRA of your change in marital status. Your filing status affects benefit calculations including the GST/HST credit, CCB, and working income credits. CRA considers you separated if you have been living apart for 90 days or more due to a breakdown of the relationship.
Capital Gains on Other Property Transfers
Transfers of property other than RRSPs and the principal residence — such as investment accounts, rental properties, or business interests — may trigger capital gains if not structured properly. Under section 73 of the Income Tax Act, transfers between spouses and common-law partners during a relationship are at adjusted cost base (no immediate gain). On separation, transfers pursuant to a court order or written agreement may also qualify. Get specific tax advice before transferring any property at separation.
Pension Income
After divorce, pension income splitting is only available to married or common-law couples filing together — it ends on the date of divorce or formal separation. Plan accordingly if a pension is a significant asset.
Practical Takeaway
Tax consequences can be worth tens of thousands of dollars in a typical BC divorce. Get a family lawyer to draft the legal agreements and a qualified accountant to review the tax implications before you sign anything. The structure of how you transfer assets and characterize payments can make a significant difference to what you actually receive.
*This article is general information only and does not constitute tax or legal advice. Consult an accountant and a BC family lawyer for advice specific to your circumstances.*
Generally, no. CRA distinguishes between periodic spousal support (deductible/taxable) and lump-sum payments (not deductible/not taxable). However, there are specific rules and exceptions — get tax advice before structuring a lump-sum settlement.
You will owe income tax on the full amount withdrawn, plus a withholding tax at source. This is an expensive mistake. The correct approach is a direct RRSP-to-RRSP transfer under s.146(16) ITA using Form T2220 and a court order or written agreement.
It depends. The principal residence exemption requires the property to have been 'ordinarily inhabited' by you or your spouse/family in the relevant year. The rules for separating spouses are complex — get tax advice before any transfer of the matrimonial home.
CRA does not monitor separations, but you are legally required to notify them within 30 days using form RC65. Benefits like the CCB, GST/HST credit, and others are recalculated based on your new marital status and individual income — so it's in your interest to update them promptly.