Difference between revisions of "Tax Implications of Support Payments"

Latest revision as of 18:43, 30 April 2021

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Samantha de Wit, Brown Henderson Melbye in April 2020.

Different income tax rules apply to spousal support and child support. Spousal support payments are handled one way, and child support payments another. Learn how the tax rules affect you.

What you should know

Different tax rules apply to spousal support and child support

After a couple separates, one spouse may be obligated to pay the other spousal support to help with living expenses. If they have children, one parent may be obligated to pay the other child support to help cover the costs of raising them. (Or, both parents may be obligated to pay the other in a shared parenting arrangement).

Different tax rules apply to each of these types of support payments.

Spousal support is considered taxable income for the spouse who receives it. It counts as a tax deduction for the spouse paying it.

Child support, however, is generally not taxable or deductible.

We explain these general rules and what these terms mean below.

Spousal support is usually taxable and deductible

Spousal support payments are like any other kind of income. The spouse who receives them (the recipient) must report the support payments as taxable income to the Canada Revenue Agency. And they must pay income tax on the payments.

The spouse who pays the support (the payor) can claim it as a deduction. (It’s like deducting contributions to registered retirement plans or child care expenses). These deductions reduce the amount of income tax the payor has to pay.

When spousal support payments are taxable and deductible

For spousal support payments to be taxable and deductible, all child support payments must be fully paid in the current and previous years. Also, the spousal support payments must be:

Paid because of a written agreement or a court order. The written agreement or court order must clearly state the amount to be paid to the recipient as spousal support.
Paid on a periodic basis, such as once a month or once every two weeks. (Spousal support paid in a one-off lump sum is generally not taxable or deductible.)
Actually paid by the payor.

Spousal support that’s paid indirectly, such as by paying the mortgage, may not be taxable or deductible. If you are considering such an arrangement, you should get legal advice.

Tip Spousal support decisions have serious tax consequences for both spouses. You should get advice from a family lawyer or tax advisor before signing a support agreement.

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 support agreement or court order. A couple can agree between themselves that spousal support will be paid. But the payor won’t be able to claim a deduction on their taxable income unless they have a written agreement or court order confirming the periodic spousal support.

If the parties have a written separation agreement, it must state the separation date. It should also set out the terms of the spousal support payments to be made, including:

the date the support payments begin,
when the payments are due, and,
the amount payable.

A spousal support order or written agreement must be registered with the Canada Revenue Agency. (You don’t need to register an order or agreement if it’s for child support only.) To register your spousal support order or agreement, you need to fill out the registration of family support payments form. Then submit it to the Canada Revenue Agency.

Tip Spousal support payments are tax deductible and child support payments aren’t. Because of this, an agreement or order must be clear about what kind of support is being paid and how much. If the agreement says one sum is to be paid for both spousal support and child support, the Canada Revenue Agency will treat the whole amount as child support. In that circumstance, the spouse paying support will not get a tax deduction.

The spousal support must be paid by a spouse to their spouse

Generally speaking, spousal support payments are only taxable and deductible if they’re made by a spouse to a spouse or former spouse.

The payor shouldn’t have someone else make the support payments on their behalf, or pay them out of a joint account.

Support payments aren’t usually deductible if they’re paid to someone else. A spouse might, for example, pay a smaller amount of spousal support. But, they may make up the difference by covering the mortgage on the family home. Before agreeing to this kind of payment arrangement, it’s important to get the advice of a lawyer or accountant. You want to be sure that Canada Revenue Agency will treat the support payments in the way that works best for your financial situation.

Proving that the spousal support payments were actually paid

For spousal support payments to be taxable and deductible, the payments must be actually paid.

Problems can come up when support is paid in cash. One spouse might say they made a payment while the other spouse denies receiving it.

It’s a good idea to make support payments by cheque, electronic money transfer, bank draft, or money order. These are ways that prove you paid. If a payment is made in cash, it’s important to get a signed receipt from the spouse. It should clearly state the amount, the date, and the purpose of the payment.

Tip Keep a record of every spousal support payment. Keep copies of cancelled cheques or receipts of electronic money transfers. Make a note on each cheque or receipt what time period the payment covered.

Child support is usually not taxable or deductible

For child support orders or agreements made after 1997, there are no tax implications for child support payments. That is, the recipient can’t claim them and the payor can’t deduct them.

Parents with a child support order or agreement made before 1997

Up until 1997, child-support payments were taxable and deductible. So if child support is being paid under a written agreement or court order made before 1997, those older rules apply. That is, in those cases, child support is taxable income for the recipient and is deductible from the payor’s taxable income.

Tip Parents with an agreement or order made before 1997 can, legally, “grandfather in” the old rules which allowed tax credits and deductions for child support payments. But the couple can also agree not to. That is, they can agree that they will follow the current tax rules (so child support would not be taxable and deductible). If they do decide to go that route, they must file a form with the Canada Revenue Agency. Once they do this, they can’t go back to the old rules.

Some legal fees and expenses are tax deductible

For the support recipient, the cost of getting or enforcing support is deductible from their income. That is, legal fees for these actions can be deducted. (Though only the fees relating to the support amount.)

The cost of defending a claim for support or payment of support is not deductible.

Tip Ask your lawyer for a letter estimating how much of their time on your file went towards the spousal support or child support claim. That will help you know how much you can deduct on your taxes.

Who can help

With more information

Canada Revenue Agency has information on their website about how taxes affect support payments.

Visit website

The Canadian Bar Association has an online resource called the Tax Matters Toolkit. It explains the rules that apply when you separate or divorce, including child support rules.

Visit website

Free and low-cost legal help

Options for legal help include legal aid, pro bono services, legal clinics, and advocates. See our information on free and low-cost legal help.

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+{{REVIEWEDPLS | reviewer = [http://bhmlawyers.ca/team-2/samantha-de-wit/ Samantha de Wit], Brown Henderson Melbye|date= April 2020}} {{Dial-A-Law TOC|expanded = divorce}}
+Different income tax rules apply to spousal support and child support. Spousal support payments are handled one way, and child support payments another. Learn how the tax rules affect you.
-{{Dial-A-Law TOC|expanded = family}}
+==What you should know==
-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 [[Spousal Support (Script 123)|123]]; for information about getting or paying child support, refer to script [[Child Support (Script 117)|117]].
+===Different tax rules apply to spousal support and child support===
+After a couple separates, one spouse may be obligated to pay the other '''spousal support''' to help with living expenses. If they have children, one parent may be obligated to pay the other '''child support''' to help cover the costs of raising them. (Or, both parents may be obligated to pay the other in a shared parenting arrangement).
-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.
+Different tax rules apply to each of these types of support payments.
-==The ''Income Tax Act'' has complex rules for support payments ==
+Spousal support is considered '''taxable income''' for the spouse who receives it. It counts as a '''tax deduction''' for the spouse paying it.
-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.
+Child support, however, is generally '''not''' taxable or deductible.
-==Different tax rules apply to spousal support and child support==
+We explain these general rules and what these terms mean below.
-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==
+===Spousal support is usually taxable and deductible===
-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 are like any other kind of income. The spouse who receives them (the recipient) must report the support payments as taxable income to the Canada Revenue Agency. And they must pay '''income tax''' on the payments.
-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.
+The spouse who pays the support (the payor) can claim it as a '''deduction'''. (It’s like deducting contributions to registered retirement plans or child care expenses). These deductions reduce the amount of income tax the payor has to pay.
-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.
+===When spousal support payments are taxable and deductible===
+For spousal support payments to be taxable and deductible, all child support payments must be fully paid in the current and previous years. Also, the spousal support payments must be:
-==To be tax deductible and taxable, the spousal support must actually be paid==
+# Paid because of a written agreement or a court order. The written agreement or court order must clearly state the amount to be paid to the recipient as spousal support.
-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.
+# Paid on a periodic basis, such as once a month or once every two weeks. (Spousal support paid in a one-off lump sum is generally ''not'' taxable or deductible.)
+# Actually paid by the payor.
-==Problems can happen if spousal support is offset by another payment==
+Spousal support that’s paid indirectly, such as by paying the mortgage, may not be taxable or deductible. If you are considering such an arrangement, you should get legal advice.
-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==
+{| class="wikitable"
-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.
+|align="left"|'''Tip'''
+Spousal support decisions have serious tax consequences for both spouses. You should get advice from a family lawyer or tax advisor before signing a support agreement.
+|}
-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 must be a written agreement or a court order====
+For spousal support payments to be taxable and deductible, there has to be a '''written support agreement or court order'''. A couple can agree between themselves that spousal support will be paid. But the payor won’t be able to claim a deduction on their taxable income unless they have a written agreement or court order confirming the periodic spousal support.
-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.
+If the parties have a written separation agreement, it must state the separation date. It should also set out the terms of the spousal support payments to be made, including:
-==Support payments can only be made to the spouse, not to someone else==
+* the date the support payments begin,
-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.
+* when the payments are due, and,
+* the amount payable.
-==People sometimes disagree about whether a payment was actually made==
+A spousal support order or written agreement must be registered with the Canada Revenue Agency. (You don’t need to register an order or agreement if it’s for child support only.) To register your spousal support order or agreement, you need to [https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1158.html fill out the '''registration of family support payments''' form]. Then submit it to the Canada Revenue Agency.
-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==
+{| class="wikitable"
-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.
+|align="left"|'''Tip'''
+Spousal support payments are tax deductible and child support payments aren’t. Because of this, an agreement or order must be clear about what kind of support is being paid and how much. If the agreement says one sum is to be paid for both spousal support and child support, the Canada Revenue Agency will treat the whole amount as child support. In that circumstance, the spouse paying support will not get a tax deduction.
+|}
-==Parents with old orders and agreements can agree to change the deductibility of child support==
+====The spousal support must be paid by a spouse to their spouse====
-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.
+Generally speaking, spousal support payments are only taxable and deductible if they’re made by a spouse to a spouse or former spouse.
-==The written agreement or court order must say what kind of support is being paid==
+The payor shouldn’t have someone else make the support payments on their behalf, or pay them out of a joint account.
-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==
+Support payments aren’t usually deductible if they’re paid to someone else. A spouse might, for example, pay a smaller amount of spousal support. But, they may make up the difference by covering the mortgage on the family home. Before agreeing to this kind of payment arrangement, it’s important to get the advice of a lawyer or accountant. You want to be sure that Canada Revenue Agency will treat the support payments in the way that works best for your financial situation.
-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 Ac''t 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.
+====Proving that the spousal support payments were actually paid====
+For spousal support payments to be taxable and deductible, the payments must be '''actually paid'''.
-Additional information about the [http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/232/lgl-eng.html deduction of lawyer’s fees] is available from the Canada Revenue Agency at [http://www.cra-arc.gc.ca www.cra-arc.gc.ca]. Search for “Line 232 - Legal fees”.
+Problems can come up when support is paid in cash. One spouse might say they made a payment while the other spouse denies receiving it.
+It’s a good idea to make support payments by cheque, electronic money transfer, bank draft, or money order. These are ways that prove you paid. If a payment is made in cash, it’s important to get a signed receipt from the spouse. It should clearly state the amount, the date, and the purpose of the payment.
-[updated February 2015]
+{| class="wikitable"
+|align="left"|'''Tip'''
+Keep a record of every spousal support payment. Keep copies of cancelled cheques or receipts of electronic money transfers. Make a note on each cheque or receipt what time period the payment covered.
+|}
-'''The above was last reviewed for accuracy by JP Boyd and Anna Kurt.'''
+===Child support is usually not taxable or deductible===
-----
+For child support orders or agreements made '''after 1997''', there are no tax implications for child support payments. That is, the recipient can’t claim them and the payor can’t deduct them.
+====Parents with a child support order or agreement made before 1997====
+Up until 1997, child-support payments ''were'' taxable and deductible. So if child support is being paid under a written agreement or court order made '''before 1997''', those '''older rules apply'''. That is, in those cases, child support is taxable income for the recipient and is deductible from the payor’s taxable income.
+{| class="wikitable"
+|align="left"|'''Tip'''
+Parents with an agreement or order made ''before 1997'' can, legally, “grandfather in” the old rules which ''allowed'' tax credits and deductions for child support payments. But the couple can also agree '''not''' to. That is, they can agree that they will follow the ''current'' tax rules (so child support would not be taxable and deductible). If they do decide to go that route, they must file a form with the Canada Revenue Agency. Once they do this, they can’t go back to the old rules.
+|}
+===Some legal fees and expenses are tax deductible===
+For the support '''recipient''', the cost of '''getting or enforcing''' support is deductible from their income. That is, [https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c3-support-payments.html#toc9 legal fees for these actions ''can'' be deducted]. (Though only the fees relating to the support amount.)
+The cost of defending a claim for support or payment of support is ''not'' deductible.
+{| class="wikitable"
+|align="left"|'''Tip'''
+Ask your lawyer for a letter estimating how much of their time on your file went towards the spousal support or child support claim. That will help you know how much you can deduct on your taxes.
+|}
+==Who can help==
+===With more information===
+'''Canada Revenue Agency''' has information on their website about how taxes affect support payments.
+* [https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p102/support-payments.html Visit website]
+The '''Canadian Bar Association''' has an online resource called the ''Tax Matters Toolkit''. It explains the rules that apply when you separate or divorce, including child support rules.
+*[https://www.cba.org/CBAMediaLibrary/cba_na/PDFs/Sections/taxMattersToolkitClients_Eng.pdf Visit website]
+===Free and low-cost legal help===
+Options for legal help include legal aid, pro bono services, legal clinics, and advocates. [[Free and Low-Cost Legal Help|See our information on free and low-cost legal help]].
+{{Dial-A-Law_Navbox|type=families}}
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