Tax Implications of Support Payments (No. 133)

From Clicklaw Wikibooks

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.



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