Difference between revisions of "Tax Implications of Support Payments"

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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}}
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==


==What you should know==
===Different tax rules apply to spousal support and child support===
===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.  
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 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.  
Different tax rules apply to each of these types of support payments.


Child support is generally not taxable or deductible.
Spousal support is considered '''taxable income''' for the spouse who receives it. It counts as a '''tax deduction''' for the spouse paying it.


We explain what these terms mean below.
Child support, however, is generally '''not''' taxable or deductible.


===Spousal support is usually taxable and deductible===
We explain these general rules and what these terms mean below.
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.  
===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 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.
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.


For spousal support payments to be taxable and deductible, the payments must be:
===When spousal support payments are taxable and deductible===
*paid because of a written agreement or a court order,
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 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.  
# 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 is paid indirectly, such as by paying the mortgage or by providing services in kind, may not be taxable or deductible.  
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.


{| class="wikitable"
{| class="wikitable"
|align="left"|'''Tip'''
|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.
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.
|}
|}


===The spousal support must actually be paid===
====There must be a written agreement or a court order====
For spousal support payments to be taxable and deductible, the payments must be '''actually paid'''.
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:


====Proving the payments were made====
* the date the support payments begin,
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.
* when the payments are due, and,
* the amount payable.


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.  
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.


{| class="wikitable"
{| class="wikitable"
|align="left"|'''Tip'''
|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.
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 problem with offsetting support payments====
====The spousal support must be paid by a spouse to their spouse====
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.  
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'''.


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.
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.


===There must be a written agreement or a court order===
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.
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"
{| class="wikitable"
|align="left"|'''Tip'''
|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.
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 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 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.
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.


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 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.


====Parents with an order or agreement made before 1997====
{| class="wikitable"
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.  
|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===
===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.  
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.  
The cost of defending a claim for support or payment of support is ''not'' deductible.


{| class="wikitable"
{| class="wikitable"
|align="left"|'''Tip'''
|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.  
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.
|}
|}


==Get help==
==Who can help==


===With more information===
===With more information===
'''Canada Revenue Agency''' has information on their website about the tax implications of support payments.
'''Canada Revenue Agency''' has information on their website about how taxes affect 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]


* [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.


[updated May 2017]
*[https://www.cba.org/CBAMediaLibrary/cba_na/PDFs/Sections/taxMattersToolkitClients_Eng.pdf Visit website]


'''The above was last reviewed for legal accuracy by [http://jimalelawcorp.com/about-zahra/ Zahra H. Jimale], Jimale Law Corporation.'''
===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]].


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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:

  1. 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.
  2. 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.)
  3. 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.

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.

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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