The CRA and Family Law have different definitions on what is considered to be a separation date. For example, under a Family Law’ definition a couple living in the same house, with a number of qualifying circumstances, can be considered separated. This is important for property division.
However, it’s after you physically move out to a different address and stay there for 90 days that you can be considered separated according to the CRA’ definition. Refer to the link: http://www.cra-arc.gc.ca/bnfts/mrtl/menu-eng.html.
This is important to know what is your CRA tax status as it directly affects your Canada Child Tax Benefit entitlement, dependent credits and tax deductions.
CRA Tax status “Married”
Thomas is earning $100,000/yr and his wife Sandra is earning $30,000/yr., as a married couple they don’t receive any of the CCTB and have no dependent credits.
For the time being, they have not yet decided how to split their matrimonial home and they continue to live under the same roof. They have separate bank accounts, don’t communicate with each other and consider themselves as separated.
Thomas and Sandra file their income taxes separately as Sandra detests the idea of going to the same accountant as Thomas uses. She thinks they both can plot against her.
Both tell their respective accountants that their status is “SEPARATED” and this triggers a retroactive payment of Canadian Child Tax Benefit to Sandra. Looks like good news. But shortly afterwards – just as Sandra have spent newly found fortune – she receives a letter from CRA asking to pay it all back. Why?
Well, the issue is that the CRA received Thomas’s return and eventually something got synchronized in such a way that it became evident that couple lives in the same house. Under this condition, no one is qualified for CCTB. The same goes for dependent credit, childcare deduction, etc.
It is an honest and such an easy-to-make mistake. But, having the same accountant would have caught this issue at the time of filing.
CRA Tax Status “Separated”
Derek and Mary were living separately and apart for over a year. The couple has shared custody of both their children. Because the separation agreement was still in the works, they thought their CRA status was “MARRIED”.
By having them file the RC65 (CRA marital status change form) and certify that they lived separately an apart for the past 16 months, we triggered the tax reassessment. Not only both parents got their retroactive share of CCTB but also had their dependent credit applied.
Dependent credit entitlement in the situation of a shared custody is a big issue that largely depends on a proper wording of the respective clause in the separation agreement. Advice from a divorce financial professional is worth thousands of dollars of future tax savings.
The total was $8,070; of which $3,890 was dependent credit for both and $4,180 retroactive child tax benefit. This was a huge relief for both parties and allowed them to pay off mounting credit card debt and left cash on hand to finalize their separation agreement.