Income Tax Implications of Support Payments (Script 133)
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This script discusses the income tax implications of spousal support (sometimes called maintenance or alimony) and child support. For information about getting or paying spousal support, refer to script 123; for information about getting or paying child support, refer to script 117.
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.
- 1 The Income Tax Act has complex rules for support payments
- 2 Different tax rules apply to spousal support and child support
- 3 Spousal support is usually deductible and taxable
- 4 To be tax deductible and taxable, the spousal support must actually be paid
- 5 Problems can happen if spousal support is offset by another payment
- 6 There must be a written agreement or a court order
- 7 Support payments can only be made to the spouse, not to someone else
- 8 People sometimes disagree about whether a payment was actually made
- 9 Child support payments are usually not deductible or taxable
- 10 Parents with old orders and agreements can agree to change the deductibility of child support
- 11 The written agreement or court order must say what kind of support is being paid
- 12 Some legal fees and expenses are tax deductible
The Income Tax Act has complex rules for support payments
It’s a good idea to have legal advice and even to talk to an accountant about how the tax rules may apply before signing any agreement about spousal or child support.
The Income Tax Act refers to spousal support as “support amount” and “maintenance”, and to child support as “child support amount”. The terms “spousal support” and “child support” will be used in this script.
Different tax rules apply to spousal support and child support
Spousal support is generally deductible for the payor and taxable for the recipient, while child support is generally not deductible or taxable.
Spousal support is usually deductible and taxable
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 payments must be paid on a periodic basis if they are to be taxable for the recipient and deductible for the payor, and the requirement to pay must be set out in a written agreement or a court order.
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 to consult with a lawyer or tax advisor.
To be tax deductible and taxable, the spousal support must actually be paid
It is important to keep a record of every support payment. For instance, if support payment is paid by cheque, electronic money transfer, bank draft or money order, the payor should keep copies of the receipts and cancelled cheques. Also, the payor should not have someone else make the spousal support payments on his or her behalf or 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.
Problems can happen if spousal support is offset by another payment
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.
There must be a written agreement or a court order
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.
In the case of a written separation agreement, the agreement must state the date of separation, as well as the terms of any support payments to be made, such as the date the support payments will begin, when the payments are due and the exact amount payable. The details and wording of separation agreements are very important.
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. Thus, it is critical to get advice from a lawyer first.
Support payments can only be made to the spouse, not to someone else
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, it is important to get the advice of a lawyer or accountant to be sure that the payments will be treated by the Canada Revenue Agency in a particular way.
People sometimes disagree about whether a payment was actually made
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 payment is made in cash, it is important to get a receipt from the spouse clearly stating the amount, the date and the purpose of the payment.
Child support payments are usually not deductible or taxable
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, the payor can’t deduct child support, and the receiver of child support does not have to pay tax on the child support payment.
Parents with old orders and agreements can agree to change the deductibility of child support
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.
The written agreement or court order must say what kind of support is being paid
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.
Some legal fees and expenses are tax deductible
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.
The Income Tax Act permits the deduction of legal fees, but determining how much of the lawyer’s bill went to the support claim may be difficult. While it’s possible to ask the 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. Thus, in order to avoid uncertainties, inform the lawyer right from the outset.
[updated February 2015]
The above was last reviewed for accuracy by JP Boyd and Anna Kurt.
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