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    TaxKilnCanadian tax guidance

    Divorce & Separation

    Separation triggers a cascade of tax mechanics that are easy to mishandle: property transfers default to rollover treatment but can be elected out of, RRSPs can be split tax-free under a court order, spousal support is deductible to the payer but child support is not, and CCB must be recalculated within 30 days. This guide is statute-cited to ITA s. 73, s. 146(16), s. 56, s. 60, and s. 122.6.

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    Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact CRA. Read our editorial scope →

    1. Property transfer rollover — ITA s. 73

    Capital property transferred to a current or former spouse pursuant to a written separation agreement or court order rolls over at adjusted cost base automatically (s. 73(1)). No immediate capital gain to the transferor; the recipient inherits the ACB and triggers gain on eventual disposition. The transferor may elect out of the rollover to recognize gain immediately — useful when one spouse has unused capital losses or LCGE room.

    2. Principal Residence Exemption — two homes, two designations

    Until 1982, each spouse could designate a separate property as principal residence. Since then, a couple is limited to one PRE per family unit per year. On separation, this constraint ends — each former spouse can designate one property for years after the separation. Strategic planning allows allocating PRE designations to whichever property has appreciated most per year of ownership.

    3. RRSP rollover — ITA s. 146(16)

    Tax-free RRSP/RRIF split under court order
    Per s. 146(16) (RRSP) and s. 146.3(14) (RRIF), amounts transferred between spouses' registered plans pursuant to a written separation agreement or court order are tax-free. Form T2220 effects the transfer. No contribution-room implications for either party — this is a transfer, not a contribution.

    4. Spousal support vs child support — different treatment

    • Spousal support: deductible to payer (line 22000), taxable to recipient (line 12800) — but only if paid as periodic payments under a written agreement or court order (ITA s. 60(b) and s. 56(1)(b)).
    • Child support ordered or agreed after April 1997 is neither deductible nor taxable (s. 60.1 / s. 56.1). Pre-May-1997 orders may still attract the old rules unless varied.
    • Order of priority: where a single payment covers both, child support is deemed paid first. Underpayments reduce the deductible spousal portion before reducing the non-deductible child portion.

    5. CCPC share division

    Private corporation shares transferred under s. 73 roll over at ACB. TOSI (Tax on Split Income, s. 120.4) implications must be considered if the recipient spouse remains a non-active shareholder receiving dividends — they may face top-rate tax on distributions. Section 86 share reorganization or estate freeze structures often used to separate economic interests cleanly. Valuation of CCPC shares for division typically requires a Chartered Business Valuator.

    6. CCB recalculation — 30-day notification

    CRA requires marital status change notification within 30 days after the month a separation of 90+ days occurs (per CCB administrative rule). Update via CRA My Account or Form RC65. CCB is recalculated based on individual (not family) net income, often increasing benefits substantially for the lower-income spouse who has primary custody.

    7. CPP credit splitting — Division of Unadjusted Pensionable Earnings (DUPE)

    Either former spouse can apply (no consent required) to split CPP contributions earned during the cohabitation period equally. Particularly valuable where one spouse had significantly higher lifetime earnings. Apply via Service Canada — no statute of limitation in most cases.

    8. Legal fee deductibility

    • Recipient of support: legal fees paid to establish, enforce, or increase support payments are deductible (CRA Folio S1-F3-C3).
    • Payer of support: legal fees to negotiate or reduce support obligations are not deductible.
    • Legal fees for division of property are not deductible by either party (capital in nature).

    9. Other items to update

    • RRSP/TFSA/RDSP beneficiary designations
    • Will and powers of attorney
    • Insurance beneficiaries
    • Eligible dependant credit (single parent claiming a child) — line 30400
    • GST/HST credit and provincial credits — adjusted automatically once marital status updated

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