Income Tax Issues of Separation and Divorce
By the time the agreement is signed, support deductibility and the rollover treatment are already locked in. Work through the elections, the 90-day deadlines, and the drafting language that decide whether the split is tax-free or expensive.
Tax Issues on Separation and Divorce: Spousal Support, Property Rollovers, and Splitting a Private Company
Most separation files reach the accountant after the agreement is signed — when the deductibility of support, the principal residence designation, and the rollover treatment of the house and the company shares are already locked in. This session works the rules in the order they arise on a real file, with the elections, deadlines, and drafting language that decide each outcome.
The calendar decides most of it. Capital gains attribution continues after separation unless a joint election is filed. Related-party butterfly treatment survives for a married couple but is lost 90 days after a common-law couple splits. In one worked example, a missing written separation agreement left one spouse with a $266,667 taxable gain on a condo she could otherwise have sheltered in full.
- check_circle Spousal support deductibility. The six conditions, the McKimmon periodic-payment factors, the child-support ordering rule that quietly kills a deduction, and the third-party payment provisions that must be cited by subsection number to work.
- check_circle Property division and the principal residence. The subsection 73(1) rollover and when to elect out, the one-designation-per-couple rule, and RRSP, RRIF, FHSA, and CPP credit splitting.
- check_circle Splitting a private company. A section 85 transfer and 84(3) deemed dividend worked end to end, why the parties must stay married through the reorganization, and how 55(3)(a) is lost for common-law partners after 90 days.
- check_circle The conflict, and what follows for years. CPA Code Rules 210.1–210.4, legal fee deductibility, the eligible dependant credit, the Canada Child Benefit reset, and the indemnity clause that can trigger reportable-transaction exposure for both parties and their advisors.
What You'll Learn
Six modules, in the order the issues arise on a file — from establishing the date of separation through support, property, the corporate split, and the credits and benefits that close it out.
expand_more Date of Separation, Common-Law Status, and the Conflict of Interest
- Why acting for the family becomes a conflict on separation — CPA Code Rules 210.1 to 210.4, management techniques, and the documentation required to continue the engagement
- Spouse versus common-law partner: the 12-month cohabitation test, the parent-of-a-child alternative, and the deeming rule that keeps a partnership alive after the split
- The "separate and apart" test and the M v. H conjugal factors, including couples living apart under one roof
- The 90-day rule, a reconciliation that resets the 12-month clock, and why living apart for other reasons does not count
- How the separation date drives support deductibility, rollovers, attribution, and principal residence claims
expand_more Spousal Support Deductibility: The Six Conditions
- Child versus spousal support, pre-May 1997 agreements, and when deductibility is actually desirable
- What qualifies as a written agreement — signed documents, solicitors' correspondence, and why email exchanges likely fall short
- The Gagnon test for an allowance, and the drafting failure that turns a global payment into wholly non-deductible child support
- The McKimmon periodic-payment factors, when a lump sum still qualifies, and Form T1198 retroactive averaging on a $40,000 example
- Prior payments validated under 56.1(3) and 60.1(3), and the one-year limit that produced only two years of deductions from three years of payments
expand_more Third-Party Payments, the 60(b) Ordering Rule, and Non-Resident Support
- The general rule in 60.1(1) and the specific rule in 60.1(2) and 56.1(2) — and why the agreement must cite the subsections by number
- The limits: medical, educational, and residence expenses only; the 1/5 of original mortgage principal cap; and the trap where a mortgage-free home leaves large payments undeductible
- Three worked examples — a car loan that fails the discretion test, mortgage payments that succeed, and rent deductible while school fees are not
- The ordering rule applying payments to non-deductible child support arrears first, worked through the 60(b) formula over two years
- Cross-border support: treaty relief, no Part XIII withholding to non-residents, and structuring a Canadian deduction with no foreign inclusion
- Registration on Form T1158, and why child-support-only agreements should not be registered
expand_more Subsection 73(1) Rollover, Principal Residence Designation, and Registered Plans
- The automatic 73(1) rollover, the property-by-property election out, and an example where electing out used $200,000 of expiring capital losses instead of wasting them
- The one-designation-per-couple rule, the written-agreement requirement that failed in Blanko Estate, and the CRA position that the first spouse to file wins
- The same facts producing either a $320,000 or a $266,667 taxable gain depending on who designates — and the agreement that would have avoided it
- Subsection 40(4) on rollover, the flipped-property exclusion for relationship breakdown, RRSP, RRIF and FHSA transfers, and the spousal RRSP attribution rule that switches off on separation
- CPP credit splitting under section 55.1, the unilateral application, the exclusions, and why combined pensions after a split are often lower
expand_more Attribution Rules, Section 85 Transfers, and the Related-Party Butterfly
- Why income attribution stops automatically on separation but capital gains attribution continues until a joint election is filed — or until divorce
- Buying out a spouse through the shareholder loan account, and distributing via CDA, ERDTOH and NERDTOH before resorting to a reorganization
- A $2,000,000 company worked in full: the discount to $1,800,000, the section 85 transfer to Newco, the 84(3) deemed dividend, and why the parties must stay married through the reorganization
- The same facts as common-law partners: how 55(3)(a) is lost after 90 days, the resulting capital gain, the LCGE alternative, and the GAAR concern it carries
- The related-party butterfly across a corporate group, plus tax-free trust distributions under 107(2) and the 248(20) to (23) partition rules
expand_more Legal Fee Deductibility, Eligible Dependant Credit, CCB, and Equalization
- Which legal and accounting fees are deductible — the recipient/payor asymmetry, the accrual basis, and fees that may still qualify as business expenses
- The eligible dependant credit conditions, the one-child limit, and the year-of-separation choice between spousal support and the spousal credit
- Child care expenses: when the higher-income spouse can claim, the 90-day and year-end conditions, and the CRA position on joint custody
- The Canada Child Benefit reset under 122.62(6), Form RC65, and the payroll variation letter on Form T1213 for support payors
- Tax discounts on equalization: which assets carry embedded tax, why the discount itself gets discounted, and how timing and interest rates change the number
- How a routine indemnity clause can trigger the contractual protection hallmark and reportable-transaction exposure for both parties and their advisors
Learn Directly from Tax Experts
Managing partner at Cadesky Tax and a contributor to the tax and accounting professions since 1980, earning the title of Fellow from CPA Ontario. Past governor of the Canadian Tax Foundation, past chair of STEP Canada and STEP Worldwide, and past chair of the CPA Canada Tax Committee for Small and Medium-Sized Enterprises. Co-author of 11 books on tax subjects.
Independent tax consultant who has taught income tax for over 30 years. Hugh has written courses for CPA Canada and over 10 papers for the Canadian Tax Foundation and STEP Canada. From 1990 to 1992 he worked at the CRA's Rulings Directorate in Ottawa writing butterfly tax rulings, and is a past Governor of the Canadian Tax Foundation.
Frequently Asked Questions
Can I start right away? expand_more
Yes. Recorded live on March 12, 2024 and available on demand. Register and begin immediately at your own pace.
Does this course provide verifiable CPD? expand_more
Yes. You will receive a verifiable CPD certificate for 2.0 hours of instructional learning upon completion.
What is included with registration? expand_more
The full seminar recording, slides, and a knowledge assessment, with one year of access from your date of registration.
Who is this course for? expand_more
CPAs and tax professionals advising individuals or owner-managed businesses — particularly if you prepare asset listings for legal counsel, advise on the tax treatment of support, or plan the division of property and private company interests.
Is there a cost to register? expand_more
Registration is $150 CAD, a one-time payment with no subscription required.