Difference between revisions of "Tax Implications of Support Payments"

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The references to “spouse” apply to everyone who is an unmarried spouse or married spouse, sometimes called a common-law spouse, and includes ex-spouses. The references to “parent” apply to everyone who is a parent, including married and unmarried spouses, to stepparents, and to people who were never in a married or unmarried relationship but have a child together.

It’s a good idea to have legal advice and even to talk to an accountant about how the tax rules may apply before you come to any agreement about support with your spouse.

The general rule is this: spousal support is taxable income in the hands of the spouse receiving it and is a tax deduction for the spouse paying it. In other words, the spouse receiving support must report the support payments as income, in the same way that income from a job is taxable, and pay income tax on the support he or she receives. The spouse who pays the support can claim it as a deduction from his or her taxable income in the same way that RRSP contributions are deductible.

Spousal support paid as a lump sum is not taxable or deductible. For example if everyone agreed that the payor would pay all of his or her payments right away in a single lump sum payment. Spousal support that is paid indirectly, such as by paying the mortgage or by providing services in kind, may not be taxable or deductible. Deciding how spousal support will be paid has serious tax consequences for both spouses. Make sure you consult with a lawyer or tax advisor.

Also, you must have a record of your payments. If you’re paying support, you should pay by cheque, electronic money transfer, bank draft or money order, and keep copies of the receipts and cancelled cheques. Don’t have someone else make the spousal support payments on your behalf, and don’t pay it out of a joint account. To assist with record keeping for tax purposes, write “spousal support” on the front of cheques as well as the month and year the payment is for.

Say, for example, that the payor must pay $600 a month as spousal support, but the recipient of spousal support must pay $100 a month to the payor for child support. While it would be easier to just pay $500, it can be difficult to prove to the Canada Revenue Agency that $600 in spousal support was really paid, and the CRA may only allow a $500 deduction. It’s best to just pay the whole $600 and actually get the $100 back.

For spousal support payments to be taxable and deductible, there has to be a written agreement or a court order for the payment of spousal support. If a couple simply separate and agree between themselves that spousal support will be paid, the support may be paid but it will be paid with no deduction for the payor and no tax payable by the recipient. As a result, a spouse who agrees to pay support will sometimes go to court and ask a judge to make a support order to get the benefit of the tax deduction.

There are ways to allow for the deduction of certain payments made before spouses get their court order or separation agreement, but this can be difficult and you should get advice from a lawyer first.

Generally speaking, support payments are only taxable and deductible if they are made to a spouse or former spouse, and they’re not usually deductible if they’re paid to someone else. A spouse might, for example, agree to pay a smaller amount of spousal support but also pay the mortgage on the family home. This kind of payment arrangement can be very tricky, and again, you should get the advice of a lawyer or accountant to be sure that the payments will be treated by the Canada Revenue Agency in the way that you intend.

This happens frequently when payments are made in cash. One spouse might claim to have made a payment or the other spouse might deny receiving it. As a result, it’s a good idea to make any support payments in such a way that there is proof of payment, for example, paying by cheque, electronic money transfer, bank draft or money order. If you must pay in cash, get a receipt from your spouse clearly stating the amount, the date and the purpose of the payment.

Child support is not taxable or deductible unless it is being paid as a result of a written agreement or court order made before May 1, 1997. All agreements or court orders made on or after May 1, 1997 automatically follow the new rules. After that date, you can’t deduct child support if you pay it, and you do not have to pay tax on child support if you receive it.

Parents can agree between themselves that child support payments made under an agreement or order made before May 1, 1997 will follow the new tax rules by filing a form with the CRA. Once they do this, however, they cannot go back to the old rules.

Because spousal support is generally tax deductible and child support generally isn’t, an agreement or order must say what amount is being paid for spousal support and what is paid for child support. If the agreement or order sets out a single sum to be paid for both spousal support and child support, without stating how much is for what, the CRA will treat the whole amount as child support and the payor will get no deduction, even if a part of the amount paid is supposed to be for spousal support.

The cost of obtaining or enforcing a spousal support or child support order, including an order for the payment of arrears, is deductible for the person receiving support. The cost of defending a claim for support or for the payment of arrears of support is not deductible.

To claim the deduction for your lawyer’s fees, you must show how much of your lawyer’s bill went to the support claim. While it’s possible to ask your lawyer for a letter estimating how much of their time went to the support claim, it’s usually easiest for the lawyer to keep track of their time from the beginning. If you want to claim this deduction, make sure you tell your lawyer right from the outset.