Tax Implications of Support Payments: Difference between revisions
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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 [[Spousal Support (Script 123)|123]]; for information about getting or paying child support, refer to script [[Child Support (Script 117)|117]]. | 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]]. | ||
The references to “spouse” apply to | 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. | ||
==The ''Income Tax Act'' has complex rules for support payments == | ==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. | 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. | 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== | ==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 | 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== | ==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. | 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. | 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. | 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. | ||
==To be tax deductible and taxable, the spousal support must actually be paid== | ==To be tax deductible and taxable, the spousal support must actually be paid== | ||
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==There must be a written agreement or a court order== | ==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. | 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. | 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. | ||
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==People sometimes disagree about whether a payment was actually made== | ==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 | 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. | ||
==Child support payments are usually not deductible or taxable== | ==Child support payments are usually not deductible or taxable== | ||
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==Parents with old orders and agreements can agree to change the deductibility of child support== | ==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. | 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== | ==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. | 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. | ||
==Some legal fees and expenses are tax deductible== | ==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 | 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. | ||
The ''Income Tax | 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. | ||
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”. | 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 | [updated May 2017] | ||
'''The above was last reviewed for accuracy by | '''The above was last reviewed for legal accuracy by Zahra H. Jimale'''. | ||
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