Do I need to pay tax on a divorce settlement?

Each province has laws regarding the division of marital property. Here’s what you need to know

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Q: My husband offered me a cash settlement. Do I have to pay taxes on this settlement money? And is my husband going to claim it on his personal income taxes as a deduction? If the money is taxable to me, is there any way I can lower the taxes?

Iris

A: I am not sure what process you used to come to this agreement, but there are very strict rules that must be addressed.  When you are dealing with any type of property transfer between spouses, there are laws under the Real Property Tax Act, which are enforced by the Canada Revenue Agency (CRA). As well, each province and territory is responsible for laws regarding the division and/or equalization of family or marital property, and these laws can vary from one province or territory to another.

If the cash settlement you received from your husband was for equalization of matrimonial property, then it is not considered taxable or tax deductible. If the money was for support, then a lump sum payment is neither taxable or tax deductible. In any case, you should always seek the advice of a qualified individual, such as a lawyer, prior to accepting anything in a settlement. As well, anything that is agreed upon should be documented by way of a separation agreement that has been vetted by a lawyer whom you have engaged for independent legal advice.

Consulting a lawyer will ensure you are protected going forward. A Certified Divorce Financial Analyst (such as myself) will ensure that what you settle for makes sense from a financial perspective.

I have been involved in cases where the paying spouse had made payments that were not documented on a separation agreement or negotiated as part of an agreement and then deducted the full amount on that year’s income tax forms.  One unique instance of this occurs when a paying spouse gives money to his ex-spouse out of a corporation and the accountant then produces a T4—making it fully taxable. The CRA will want you to pay taxes on this revenue and leave it up to you to fight with your spouse.

They key takeaway? The only time a rollover from one spouse to another can be done without any tax consequences is when there’s a fully executed and signed separation agreement. You only get one kick at the can, so you have to make sure you get it right the first time.

Ask a Divorce Expert: Leave your question for Debbie Hartzman »

 Debbie Hartzman is a certified divorce financial analyst with Professional Investments in Kingston, Ontario.


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