Tax Implications of Support Payments: Difference between revisions

Revision as of 05:46, 14 February 2019

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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.

Understand your legal rights

Different tax rules apply to spousal support and child support

After a couple separates, one of the parties may pay spousal support to the other to help with living expenses. If they had children, one parent may pay child support to the other to help cover the expenses associated with raising the children.

Different tax rules apply to each type of support payments.

Spousal support is taxable income in the hands of the spouse who receives it, and deductible from the taxable income of the spouse who pays it.

Child support is generally not taxable or deductible.

We explain what these terms mean below.

Spousal support is usually taxable and deductible

The general rule is this: spousal support is taxable income for the spouse receiving it and a tax deduction for the spouse paying it.

Here’s what this means. The spouse receiving support must report the support payments as taxable income, in the same way they must report wages from a job as taxable income. They must pay income tax on the support payments they receive.

The spouse who pays the support can claim it as a deduction from their taxable income, in the same way they can deduct contributions to Registered Retirement Savings Plans (RRSPs) or child care expenses. These deductions reduce the amount of income they pay tax on, so they reduce the income tax they owe.

For spousal support payments to be taxable and deductible, the payments must be:

paid because of a written agreement or a court order,
paid on a periodic basis, such as once a month or once every two weeks, and
actually paid.

Spousal support made as a lump sum payment is generally not taxable or deductible.

Spousal support that is paid indirectly, such as by paying the mortgage or by providing services in kind, may not be taxable or deductible.

Tip Deciding how spousal support will be paid has serious tax consequences for both spouses. It’s highly advisable to consult with a lawyer or tax advisor before signing an agreement involving spousal support.

The spousal support must actually be paid

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

Proving the payments were made

Problems can arise when support payments are made 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 in a way that proves you paid, such as by cheque, electronic money transfer, bank draft, or money order. If payment is made in cash, it’s important to get a signed receipt from the spouse clearly stating the amount, the date, and the purpose of the payment.

Tip Keep a record of every spousal support payment, such as by keeping 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 problem with offsetting support payments

It might be convenient to offset support payments if they are flowing in different directions. But it’s best not to, as doing so can jeopardize the ability of the spouse paying spousal support to deduct the payments from their taxable income.

Say, for example, that spouse A must pay spouse B $600 a month in spousal support. Meanwhile, spouse B must pay spouse A $100 a month for child support. While it would be easier to have spouse A just pay $500 a month, it can be difficult to prove to the Canada Revenue Agency that $600 in spousal support was really paid, and the tax authorities may only allow a $500 deduction. It’s best for spouse A to 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 court order for the payment of spousal support. If a couple simply agree between themselves that spousal support will be paid, the support may be paid but the spouse paying support will not be able to claim a deduction on their taxable income.

If the parties have a written separation agreement, the agreement must state the date of separation, as well as the terms of spousal support payments to be made, such as the date the support payments begin, when the payments are due, and the amount payable.

Tip Because spousal support payments are tax deductible and child support payments are not, an agreement or order must be clear about what kind of support is being paid and in what amount. If it sets out a single sum to be paid for both spousal support and child support, the Canada Revenue Agency will treat the whole amount as child support. The spouse paying support will get no 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 are made by a spouse to a spouse or former spouse.

The spouse paying spousal support should not have someone else make the support payments on their behalf or pay them out of a joint account.

Support payments are 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. Before agreeing to this kind of payment arrangement, it is important to get the advice of a lawyer or accountant to be sure the payments will be treated by the Canada Revenue Agency in the way that works best for your overall financial situation.

Child support is usually not taxable or deductible

Child support, meanwhile, is not generally taxable or deductible. The parent receiving child support does not pay income tax on the child support payments. The parent paying child support can’t deduct child support payments from their taxable income.

An exception is where child support is being paid under a written agreement or court order made before 1997. In that case, older rules apply. Child support is taxable income for the receiving spouse, and deductible from the taxable income of the spouse who pays it.

Parents with an order or agreement made before 1997

Parents with an agreement or order made before 1997 can agree between themselves that child support payments will follow the current tax rules. To do so, they file a form with the Canada Revenue Agency. Once they do this, they cannot go back to the old rules.

Some legal fees and expenses are tax deductible

For the person receiving spousal support or child support, the cost of obtaining or enforcing support is deductible from their income. Legal fees can be deducted — though only the fees relating to the support claim.

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

Tip To help you in deducting legal fees relating to making a spousal support or child support claim, ask your lawyer for a letter estimating how much of their time went towards the support claim.

Get help

With more information

Canada Revenue Agency has information on their website about the tax implications of support payments.

Web: cra-arc.gc.ca

[updated May 2017]

The above was last reviewed for legal accuracy by Zahra H. Jimale, Jimale Law Corporation.

Dial-A-Law © People's Law School is licensed under a Creative Commons Attribution - NonCommercial - ShareAlike 4.0 International Licence.

@@ Line 2: / Line 2: @@
 {{Dial-A-Law TOC|expanded = family}}
-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 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.
-The references to “spouse” in this script apply to married spouses and unmarried spouses, and to former 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.
+==Understand your legal rights==
-==The ''Income Tax Act'' has complex rules for support payments ==
+===Different tax rules apply to spousal support and child support===
-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.
+After a couple separates, one of the parties may pay '''spousal support''' to the other to help with living expenses. If they had children, one parent may pay '''child support''' to the other to help cover the expenses associated with raising the children.
-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 each type of support payments.
-==Different tax rules apply to spousal support and child support==
+Spousal support is '''taxable income''' in the hands of the spouse who receives it, and '''deductible''' from the taxable income of the spouse who pays it.
-Spousal support is generally tax deductible for the payor and taxable income for the recipient, while child support is generally not deductible or taxable.
-==Spousal support is usually deductible and taxable==
+Child support is generally not taxable or 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 payments 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.
+We explain what these terms mean below.
-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 before signing an agreement.
+===Spousal support is usually taxable and deductible===
+The general rule is this: spousal support is taxable income for the spouse receiving it and a tax deduction for the spouse paying it.
-==To be tax deductible and taxable, the spousal support must actually be paid==
+Here’s what this means. The spouse receiving support must report the support payments as '''taxable income''', in the same way they must report wages from a job as taxable income. They must pay '''income tax''' on the support payments they receive.
-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==
+The spouse who pays the support can claim it as a '''deduction''' from their taxable income, in the same way they can deduct contributions to Registered Retirement Savings Plans (RRSPs) or child care expenses. These deductions reduce the amount of income they pay tax on, so they reduce the income tax they owe.
-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, the payments must be:
-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.
+*paid because of a written agreement or a court order,
+*paid on a periodic basis, such as once a month or once every two weeks, and
+*actually paid.
-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.
+Spousal support made as a lump sum payment is generally not taxable or deductible.
-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.
+Spousal support that is paid indirectly, such as by paying the mortgage or by providing services in kind, may not be taxable or deductible.
-==Support payments can only be made to the spouse, not to someone else==
+{| class="wikitable"
-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.
+|align="left"|'''Tip'''
+Deciding how spousal support will be paid has serious tax consequences for both spouses. It’s highly advisable to consult with a lawyer or tax advisor before signing an agreement involving spousal support.
+|}
-==People sometimes disagree about whether a payment was actually made==
+===The spousal support must actually be paid===
-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, the purpose of the payment and signed by the recipient.
+For spousal support payments to be taxable and deductible, the payments must be '''actually paid'''.
-==Child support payments are usually not deductible or taxable==
+====Proving the payments were made====
-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.
+Problems can arise when support payments are made in cash. One spouse might say they made a payment while the other spouse denies receiving it.
-==Parents with old orders and agreements can agree to change the deductibility of child support==
+It’s a good idea to make support payments in a way that proves you paid, such as by cheque, electronic money transfer, bank draft, or money order. If payment is made in cash, it’s important to get a signed receipt from the spouse clearly stating the amount, the date, and the purpose of the payment.
-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==
+{| class="wikitable"
-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 amount is being 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.
+|align="left"|'''Tip'''
+Keep a record of every spousal support payment, such as by keeping copies of cancelled cheques or receipts of electronic money transfers. Make a note on each cheque or receipt what time period the payment covered.
+|}
-==Some legal fees and expenses are tax deductible==
+====The problem with offsetting support payments====
-The cost of obtaining or enforcing a spousal support or child support order or agreement, including an order or an agreement 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.
+It might be convenient to offset support payments if they are flowing in different directions. But it’s best not to, as doing so can jeopardize the ability of the spouse paying spousal support to deduct the payments from their taxable income.
-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.
+Say, for example, that spouse A must pay spouse B $600 a month in spousal support. Meanwhile, spouse B must pay spouse A $100 a month for child support. While it would be easier to have spouse A just pay $500 a month, it can be difficult to prove to the Canada Revenue Agency that $600 in spousal support was really paid, and the tax authorities may only allow a $500 deduction. It’s best for spouse A to 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 court order''' for the payment of spousal support. If a couple simply agree between themselves that spousal support will be paid, the support may be paid but the spouse paying support will not be able to claim a deduction on their taxable income.
+If the parties have a written separation agreement, the agreement must state the date of separation, as well as the terms of spousal support payments to be made, such as the date the support payments begin, when the payments are due, and the amount payable.
+{| class="wikitable"
+|align="left"|'''Tip'''
+Because spousal support payments are tax deductible and child support payments are not, an agreement or order must be clear about what kind of support is being paid and in what amount. If it sets out a single sum to be paid for both spousal support and child support, the Canada Revenue Agency will treat the whole amount as child support. The spouse paying support will get no 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 are made by a spouse to a spouse or former spouse.
+The spouse paying spousal support should not have someone else make the support payments on their behalf or pay them out of a joint account.
+Support payments are 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. Before agreeing to this kind of payment arrangement, it is important to get the advice of a lawyer or accountant to be sure the payments will be treated by the Canada Revenue Agency in the way that works best for your overall financial situation.
+===Child support is usually not taxable or deductible===
+Child support, meanwhile, is '''not''' generally taxable or deductible. The parent receiving child support does not pay income tax on the child support payments. The parent paying child support can’t deduct child support payments from their taxable income.
+An exception is where child support is being paid under a written agreement or court order made before 1997. In that case, older rules apply. Child support is taxable income for the receiving spouse, and deductible from the taxable income of the spouse who pays it.
+====Parents with an order or agreement made before 1997====
+Parents with an agreement or order made before 1997 can agree between themselves that child support payments will follow the current tax rules. To do so, they file a form with the Canada Revenue Agency. Once they do this, they cannot go back to the old rules.
+===Some legal fees and expenses are tax deductible===
+For the person receiving spousal support or child support, the cost of obtaining or enforcing support is deductible from their income. Legal fees can be deducted — though only the fees relating to the support claim.
+The cost of defending a claim for support or payment of support is not deductible.
+{| class="wikitable"
+|align="left"|'''Tip'''
+To help you in deducting legal fees relating to making a spousal support or child support claim, ask your lawyer for a letter estimating how much of their time went towards the support claim.
+|}
+==Get help==
+===With more information===
+'''Canada Revenue Agency''' has information on their website about the tax implications of support payments.
+:Web: [https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/support-payments.html cra-arc.gc.ca]
-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”.
 [updated May 2017]
-'''The above was last reviewed for legal accuracy by Zahra H. Jimale'''.
+'''The above was last reviewed for legal accuracy by [http://jimalelawcorp.com/about-zahra/ Zahra H. Jimale], Jimale Law Corporation.'''
+----
 ----