On Income Tax, Support Arrears, and Retroactive Support
Income tax time will be upon us soon enough. If you are receiving spousal support from your former spouse, you may wonder how those support payments should be treated when it comes time to file your income tax return with the Canada Revenue Agency.
The answer is straightforward: If you are receiving spousal support from your former spouse or common-law partner, under a court order or written agreement that specifies the amount, frequency and duration of the payments, then those amounts are fully taxable in your hands. In other words, all those amounts must be reported as “income” on your tax return, and will be taxed accordingly. (This is unlike the situation with child support, which from the recipient’s vantage point is generally considered non-taxable).
Normally, that obligation to declare your spousal support as income on your tax return triggers a corresponding entitlement by your former spouse or partner to claim an equivalent deduction on his or her tax return for those same payments, with some exceptions.
So the short answer, is that spousal support is considered “income.” But what if the payments you receive now cover support payments that your former spouse should have made in the past?
A pair of recent decisions tackled a narrow – but important – issue relating to how: 1) retroactive support, and 2) support arrears, are to be handled for personal income tax purposes.
In a case from last year called Gonsalves v. Scrymgeour, the court reviewed the law on the tax treatment of retroactive spousal support awards (being those where the support paying spouse is newly-ordered to pay an amount that covers a past period of time during which the other spouse was eligible to receive it). The court confirmed that an award of retroactive spousal support should be reduced, to take into account the benefit of the income tax deduction that the paying spouse would have been able to claim, using the mid-point of the spouse’s respective marginal tax rates.
The more recent decision in Negin v. Fryers addresses support arrears (which are unlike retroactive support because they consist of unpaid amounts that were due under an order made previously). There, the separated parents had agreed in 2004 that the father would pay child support to the mother in line with Guidelines amounts, together with a set amount of spousal support. Apparently for some of the years since then, the father overpaid child support by over $52,000, and underpaid spousal support by more than $155,000. After offsetting these amounts, the mother claimed the father owed just under $103,000 in arrears.
The father claimed – unsuccessfully – that the lump-sum gross amount he now owed the mother in arrears should be “netted down” to account for the different tax treatment of lump sum spousal support, as compared to an order for periodic support. The wife pointed out – and the court agreed – that it was the policy of the Canada Revenue Agency to allow non-retroactive lump-sum spousal support payments to be deducted by father in the role of the support payor. The court directed the parents to calculate the amount of child and spousal support owed or overpaid accordingly (as the case may be), in keeping with its specific directions and ruling.
Nobody loves tax time (except perhaps the Income Tax Preparers and Accountants!) If you have questions about the spousal support you receive, feel free to give our office a call.
For the full text of the decisions, see: