Two Necessary Evils – Know Your Obligations re: Income Tax and Spousal / Child Support
Income tax: Not a popular concept even at the best of times. But add in the obligations which arise in the context of paying child or spousal support, and it’s enough to cause heart palpitations in most Canadians.
This is because the Canada Revenue Agency rules relating to how support payments are to be treated are quite complex. To make things more confusing, the federal Income Tax Act has separate rules for spousal support as opposed to child support. Here are the key points:
Spousal support is generally deductible for the person who is paying, and is taxable as income for the recipient. In contrast, child support is neither deductible nor taxable.
This means that a spouse who is receiving regular spousal support must report the payments as income, and the spouse who is paying it can deduct it off the top of his or her income in the same way that RRSP contributions may be deducted. Lump-sum spousal support does not qualify for this, however, nor does spousal support paid indirectly (for example with one separated spouse agreeing to pay the mortgage payments of the other).
Note that this taxability/deductibility of spousal support payments only applies to payments being made pursuant to a written agreement or court order – informal arrangements made between the separating couple are not eligible for a tax deduction by the paying spouse. Any written agreement of this type must state the date of separation, the terms and exact dollar-amount of the support payments that are to be made, and the date the support payments will commence.
Child support payments are usually neither deductible by the parent who is paying them, nor taxable in the hands of the parent who is receiving them. Once again, the payments must be made as a result of a written agreement or court order, which sets out the nature of the support being paid, the amount, and other details. A lump-sum payment which does not specify that it is made in respect of child support , or that does not delineate between the spousal and child support portions, will not qualify for the deduction. It is therefore important to ensure that any separation agreement or court order makes the terms and amount of the child support payments eminently clear.
Legal Fees and Expenses
The CRA also allows a deduction to the recipient spouse or parent for the costs of obtaining or enforcing a spousal or child support order, which includes legal fees and certain enforcement-related expenses. The cost of defending a claim for support, or for the payment of arrears of support, is not deductible, however.
Get Advice Beforehand
Needless to say, this is just the tip of the iceberg in connection with how spousal and child support payments are treated for tax purposes in Canada. Legal advice is a must. But what most partners on the verge of separation or divorce often overlook, is that it’s best to obtain competent legal advice before coming to any agreement as to support. Otherwise, you may fail to foresee the tax ramifications of an informal spousal and child support arrangement, which can result in unpleasant surprises at tax time. Expert, early advice from a lawyer is essential.